LAKES GAMING INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 0-24993

LAKES GAMING, INC.
(Exact name of registrant as specified in its charter)

MINNESOTA 41-1913991
(State or other jurisdiction of (I.R.S., Employer
incorporation or organization) Identification No.)

130 CHESHIRE LANE, MINNETONKA, MINNESOTA 55305
(Address of principal executive offices)

(952) 449-9092
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of March 19, 2002, 10,637,953 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock held by
nonaffiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the NASDAQ National Market on March 19, 2002 was
$64,575,854. For purposes of this computation, affiliates of the Registrant are
deemed only to be the Registrant's executive officers and directors.

DOCUMENTS INCORPORATED BY REFERENCE

Part III. Portions of the Registrant's definitive Proxy Statement in
connection with the Annual Meeting of Shareholders to be held on May 29, 2002
are incorporated by reference into Items 10 through 13, inclusive.
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PART I

ITEM 1. BUSINESS

The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Lakes Gaming, Inc., a Minnesota corporation, could differ
materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
in "Risk Factors."

GENERAL

Lakes Gaming, Inc., a Minnesota corporation ("Lakes" or the "Company")
develops, constructs and manages casinos and related hotel and entertainment
facilities in emerging and established gaming jurisdictions. Lakes was formed in
1998 as the successor to the Indian gaming business of Grand Casinos, Inc.
("Grand Casinos"). Lakes has entered into the following contracts for the
development, management and/or financing of new casino operations, all of which
are subject to various regulatory approvals before construction can begin:

- Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan.

- Lakes and another company have formed partnerships with contracts to
develop and manage two casinos to be owned by Indian tribes in
California, one near San Diego and the other near Sacramento.

- Lakes and another company have formed a partnership with a contract to
finance the construction of an Indian-owned casino 60 miles north of San
Francisco, California.

- Lakes has also signed contracts with a Massachusetts Indian tribe for
development and management of a potential future gaming resort in the
eastern United States; however, this tribe has received a negative
finding regarding federal recognition from the Bureau of Indian Affairs
(BIA). The tribe has indicated that it will submit additional information
for reconsideration.

HISTORY

Lakes was established on December 31, 1998 through a spin-off of Lakes'
shares by Grand Casinos. Lakes operates the Indian casino management business
and holds other assets previously owned by Grand Casinos. Before the spin-off,
Grand Casinos had management contracts for Grand Casino Hinckley and Grand
Casino Mille Lacs, both Indian-owned casinos located in Minnesota. These
management contracts both expired in 1998. After Lakes' inception, Lakes managed
two Indian-owned casinos in Louisiana previously managed by Grand Casinos.
Lakes' historical revenues since its inception have been derived almost
exclusively from management fees for these casinos. Lakes managed the largest
casino resort in Louisiana, Grand Casino Coushatta, until the management
contract expired on January 16, 2002. For a portion of fiscal 2000 and prior,
Lakes also had a management contract for Grand Casino Avoyelles, which was
terminated through an early buyout of the contract effective March 31, 2000.

Lakes also held several parcels of commercial property in Las Vegas at the
time of the spin-off from Grand Casinos. In December 2001, Lakes sold a large
portion of this property, subject to certain post-closing conditions. Lakes
continues to hold a portion of this property with the intention of developing
it. See Item 2 -- "Properties".

BUSINESS STRATEGY

Lakes' vision is to create a company with predictable long-term profitable
growth that will be highly valued by its investors. The Company is implementing
three business strategies to accomplish its vision. The first of the three
strategies is to grow the Company's assets. The more assets the Company has, the
greater its potential for diversification and growth. The Company plans to
increase its asset base through the growth of its

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Indian casino management business. As the successor to Grand Casinos' Indian
gaming business, Lakes enjoys a reputation as a successful casino management
company for Native American owned casinos with available capital and experienced
management.

Lakes develops, constructs and manages Indian-owned casino properties that
offer the opportunity for long-term development of related entertainment
facilities, including hotels, theaters, recreational vehicle parks and other
complementary amenities designed to enhance the customers' total entertainment
experience and to differentiate facilities managed by Lakes from its
competitors. Lakes provides experienced corporate and casino management and
develops and implements a wide scale of marketing programs. In conjunction with
this part of Lakes' business strategy, Lakes has entered into development,
management and/or financing agreements relating to one casino project in
Michigan, three casino projects in California, and one casino project on the
east coast, with development of each subject to regulatory approvals. Lakes has
also explored, and will continue to explore, numerous other possible development
projects. See "Casino Projects and Agreements" below.

Consistent with its past experience in managing the Louisiana casinos,
Lakes is dedicated to developing superior facilities and providing guest service
that exceeds expectations. Facilities managed by Lakes will be staffed with
well-trained local casino employees and will offer a casual environment designed
to appeal to the family-oriented, middle income customer. Lakes strives to offer
its casino customers creative gaming selections in a pleasant, festive, smoke
and climate-controlled setting. Lakes' managed casinos also will offer
reasonably priced, high-quality food.

The second business strategy has been to remove a number of uncertainties
surrounding Lakes since the spin-off in 1998. Consistent with this part of the
Lakes strategy, in 2000 Lakes entered into settlement agreements regarding
several significant shareholder litigation matters, for which Lakes is required
to indemnify Grand Casinos. Lakes paid a total of $18 million into escrow in
2000, and this amount was distributed to the shareholder groups during 2001.
Lakes' indemnification obligations continue with respect to certain other
litigation matters, and $7.5 million paid into an escrow account for the benefit
of Grand Casinos is included as restricted cash on the accompanying balance
sheet as of December 30, 2001. See Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

Lakes has also addressed uncertainties relating to a portion of the land
owned or controlled by the Company in Las Vegas. On December 28, 2001, the
Company sold a portion of this site and certain property rights to two
partnerships which are not affiliated with Lakes. The total sale price was
approximately $30.9 million, including a $1.0 million down payment and two
promissory notes for the balance. If certain administrative post-closing
conditions are not satisfied within six months after the closing or waived by
the buyers, the buyers have the right to require Lakes to repurchase the
properties. This transaction allowed the Company to monetize a portion of its
investment in property on the Las Vegas strip. The sale will provide resources
that are currently planned to be used in Lakes' primary business, which is
Indian gaming. See Item 2 -- "Properties".

The other uncertainty facing Lakes relates to the proposed casino
developments. At two of the California locations, the tribes need to resolve
land issues related to their respective casino sites. At the third California
location, access to the proposed casino site is subject to certain regulatory
approvals. At the Michigan location, the Secretary of the Interior has accepted
the land into trust, however, during the 30-day public comment period, a group
called "Taxpayers of Michigan Against Casinos" filed a complaint to stop the
U.S. Department of Interior from placing it into trust. The Department of
Justice is defending this lawsuit on behalf of the Secretary of Interior. At the
east coast location, the tribe is attempting to obtain federal recognition, but
there is no assurance that federal recognition will be obtained. Additionally,
the National Indian Gaming Commission needs to approve Lakes' management
contracts for each location. Lakes is actively working with the tribes to bring
these issues to a successful conclusion.

Diversification is important to Lakes' long-term success and is the third
of the business strategies. Lakes currently intends to buy or create new
long-term business opportunities through the use of cash, stock or debt to
complement its Indian casino management business. Substantial long-term growth
and low multiple values to generate high returns are just a few of the
attributes in companies or start-ups that Lakes is looking for in

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new opportunities to help enhance shareholder value. As part of the Company's
effort to diversify, in March of 2002, Lakes announced that it had signed a
letter of intent with respect to an investment in a joint venture with an
experienced producer of televised poker tournaments. The purpose of the joint
venture would be to launch the World Poker Tour and establish poker as the next
significant televised mainstream sport.

CASINO PROJECTS AND AGREEMENTS

Partnership to Develop and Manage Casino Near San Diego, California. On
May 12, 1999, the Company announced that it would form a partnership for the
purpose of developing a gaming facility on Indian-owned land near San Diego,
California. Under the agreement, Lakes has formed a limited liability company
with Kean Argovitz Resorts, LLC ("KAR"), a limited liability company based in
Houston, Texas. The partnership between Lakes and KAR holds a contract to
develop and manage a casino resort facility with the Jamul Indian Village in
California. The contract is subject to approval by NIGC. In 2000, California
voters approved an amendment to the State Constitution which allows for
Nevada-style gaming on Indian land and ratifies the Tribal Compact. Development
of the casino resort will begin once various regulatory approvals are received.

Development and Management of Michigan Casino. On June 22, 1999, the
Company announced that it has been selected by the Pokagon Band of Potawatomi
Indians (the "Band") to serve as the exclusive developer and manager of a
proposed casino gaming resort facility to be owned by the Band in the state of
Michigan. In connection with its selection, Lakes and the Band have executed a
development and management agreement governing their relationship during the
development, construction and management of the casino. Various regulatory
approvals are needed prior to commencement of development activities. The United
States Department of the Interior issued a Finding of No Significant Impact
(FONSI) in January 2001 and filed a legal notice of its intent to place into
trust 675 acres near New Buffalo, Michigan on behalf of the Pokagon Band. Under
Federal law, a 30-day waiting period was required for public comments to be made
before the land in trust process could be finalized. During the 30-day period, a
lawsuit was filed against the federal government in the District Court in the
District of Columbia by a Michigan-based group called "Taxpayers of Michigan
Against Casinos", to stop the U.S. Department of Interior from placing into
trust the land for the casino site. The Department of Justice is defending the
suit on behalf of the Secretary of Interior. While the outcome of the suit
cannot be predicted at this time, Lakes' management believes that this hurdle
will be successfully overcome and the casino development will be approved.
Casino construction is not planned to start until land is accepted into trust
status by the Secretary of the Interior and the agreements are approved by the
Chairman of NIGC.

Partnership to Develop and Manage Casino Near Sacramento, California. On
July 15, 1999, the Company announced that it would form a partnership for the
purpose of developing a gaming facility on Indian-owned land near Sacramento,
California. Pursuant to the agreement, Lakes has formed a limited liability
company with KAR, a limited liability company based in Houston, Texas. The
partnership between Lakes and KAR has been awarded a contract to develop and
manage a casino resort facility with the Shingle Springs Band of Miwok Indians
in California. The contract is subject to approval by NIGC and placement of the
land where the gaming facility is to be located into trust with the Bureau of
Indian Affairs ("BIA"). In 2000, California voters approved an amendment to the
State Constitution which allows for Nevada-style gaming on Indian land and
ratifies the Tribal Compact. Development of the casino resort will begin once
various regulatory approvals are received.

Joint Venture for Further California Casinos, Including Financing of
Cloverdale, California Casino. On August 10, 2000, the Company announced that
it had agreed to form a joint venture for the purpose of developing gaming
facilities on Indian owned land in California. Under the agreement, Lakes formed
a joint venture limited liability company with MRD Gaming, a limited liability
company. The partnership between Lakes and MRD holds the contract to finance
casino facilities with the Cloverdale Rancheria of Pomo Indians. The planned
site for the potential new casino development is located on Highway 101 in
Cloverdale, California, approximately 60 miles north of San Francisco.
Development will start as soon as various regulatory approvals are obtained.
Development is also subject to completion of definitive financing arrangements.
The joint venture also entered into a contract relating to the Paskenta Band of
Nomlaki

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Indians. However, in February 2001, Lakes announced its intention to discontinue
its involvement with the Paskenta project. Lakes had made loans totaling $5.5
million to the joint venture (PCG Corning, LLC) for this project. During 2001,
Lakes wrote off approximately $1.0 million as uncollectible relating to these
loans. In October 2001, Lakes was repaid the outstanding balance of $4.5 million
on these loans.

Agreement for Possible Casino Development with Massachusetts Tribe. On
July 9, 2001, the Company announced that it had signed development and
management agreements with the Nipmuc Nation of Massachusetts for a potential
future casino resort in the eastern United States. The Nipmuc Nation's petition
for federal recognition received a proposed positive finding from the Bureau of
Indian Affairs (BIA) in January 2001. However, in September 2001, that proposed
positive finding was reversed by the BIA when it issued a negative finding
relating to the Nipmuc Nation's request for federal recognition. The Nipmuc
Nation has 180 days from the date of the negative finding to submit additional
information for reconsideration. In addition, community groups will have an
opportunity to submit comments and documentation. The tribe has indicated that
it will submit additional information for reconsideration. If approval is
received, the Nipmuc Nation would need to put land in trust and come to a gaming
agreement with the state where the land is located before proceeding with any
such enterprise.

MARKETING

Lakes' marketing strategy at its managed operations is to attract and
retain the repeat customer. Management believes that Lakes' emphasis on
providing superior guest service along with first-class facilities, coupled with
targeted marketing programs, contributes to attracting the repeat customer.

Lakes' operations strategy seeks to combine retail, gaming and
entertainment marketing techniques. Lakes profiles its casino customers
utilizing available demographic data, regularly conducted customer surveys and
other sources. Based upon this data, Lakes uses a variety of initial special
promotions to attract the first-time customer and, thereafter, seeks to leverage
initial customer satisfaction through a mix of marketing programs dedicated to
developing a repeat customer. A variety of other events, facilities and
entertainment options provide the patron with a total entertainment experience.
Lakes markets these programs through a variety of direct and media marketing
techniques utilizing a significant customer database at each location. Lakes
emphasizes guest service as part of its operating strategy. High standards are
set for well-trained and friendly employees so that customers can enjoy
themselves in a fun-filled and entertaining atmosphere.

COMPETITION

The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored video lottery and video poker in restaurants, bars
and hotels; pari-mutuel betting on horse racing, dog racing, and jai-alai;
sports bookmaking; and card rooms. The casinos managed and to be managed by
Lakes compete with all of these forms of gaming, and will compete with any new
forms of gaming that may be legalized in additional jurisdictions, as well as
with other types of entertainment. Lakes also competes with other gaming
companies for opportunities to acquire legal gaming sites in emerging gaming
jurisdictions and for the opportunity to manage casinos on Indian land. Some of
the competitors of Lakes have more personnel and greater financial and other
resources than Lakes. Further expansion of gaming could also significantly
affect Lakes' business.

REGULATION

GAMING REGULATION

The ownership, management, and operation of gaming facilities are subject
to extensive federal, state, provincial, tribal and/or local laws, regulations
and ordinances, which are administered by the relevant regulatory agency or
agencies in each jurisdiction (the "Regulatory Authorities"). These laws,
regulations and ordinances vary from jurisdiction to jurisdiction, but generally
concern the responsibility, financial stability and character of the owners and
managers of gaming operations as well as persons financially interested or
involved in gaming operations. Certain basic provisions that are currently
applicable to Lakes in its management, development and financing activities are
described below.

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Neither Lakes nor any subsidiary may own, manage or operate a gaming
facility unless proper licenses, permits and approvals are obtained. An
application for a license, permit or approval may be denied for any cause that
the Regulatory Authorities deem reasonable. Most Regulatory Authorities also
have the right to license, investigate, and determine the suitability of any
person who has a material relationship with Lakes or any of its subsidiaries,
including officers, directors, employees, and security holders of Lakes or its
subsidiaries. In the event a Regulatory Authority were to find a security holder
to be unsuitable, Lakes may be sanctioned, and may lose its licenses and
approvals if Lakes recognizes any rights in such unsuitable person in connection
with such securities. Lakes may be required to repurchase its securities at fair
market value from security holders that the Regulatory Authorities deem
unsuitable. Lakes' Articles of Incorporation authorize Lakes to redeem
securities held by persons whose status as a security holder, in the opinion of
the Lakes' Board, jeopardizes gaming licenses or approvals of Lakes or its
subsidiaries. Once obtained, licenses, permits, and approvals must be
periodically renewed and generally are not transferable. The Regulatory
Authorities may at any time revoke, suspend, condition, limit, or restrict a
license for any cause they deem reasonable.

Fines for violations may be levied against the holder of a license, and in
certain jurisdictions, gaming operation revenues can be forfeited to the State
under certain circumstances. No assurance can be given that any licenses,
permits, or approvals will be obtained by Lakes or its subsidiaries, or if
obtained, will be renewed or not revoked in the future. In addition, the
rejection or termination of a license, permit, or approval of Lakes or any of
its employees or security holders in any jurisdiction may have adverse
consequences in other jurisdictions. Certain jurisdictions require gaming
operators licensed therein to seek approval from the state before conducting
gaming in other jurisdictions. Lakes and its subsidiaries may be required to
submit detailed financial and operating reports to Regulatory Authorities.

The political and regulatory environment for gaming is dynamic and rapidly
changing. The laws, regulations, and procedures pertaining to gaming are subject
to the interpretation of the Regulatory Authorities and may be amended. Any
changes in such laws, regulations, or their interpretations could have a
material adverse effect on Lakes.

Certain specific provisions to which Lakes is currently subject are
described below.

INDIAN GAMING

The terms and conditions of management contracts for the operation of
Indian-owned casinos, and of all gaming on Indian land in the United States, are
subject to the IGRA, which is administered by NIGC, and also are subject to the
provisions of statutes relating to contracts with Indian tribes, which are
administered by the Secretary of the Interior (the "Secretary") and the BIA. The
regulations and guidelines under which NIGC will administer IGRA are evolving.
The IGRA and those regulations and guidelines are subject to interpretation by
the Secretary and NIGC and may be subject to judicial and legislative
clarification or amendment.

Lakes may need to provide the BIA or NIGC with background information on
each of its directors and each shareholder who holds five percent or more of
Lakes' stock ("5% Shareholders"), including a complete financial statement, a
description of such person's gaming experience, and a list of jurisdictions in
which such person holds gaming licenses. Background investigations of key
employees also may be required. Lakes' Articles of Incorporation contain
provisions requiring directors and 5% Shareholders to provide such information.

IGRA currently requires NIGC to approve management contracts and certain
collateral agreements for Indian-owned casinos. Prior to NIGC assuming its
management contract approval responsibility, management contracts and other
agreements were approved by the BIA. The NIGC may review any of Lakes'
management contracts and collateral agreements for compliance with IGRA at any
time in the future. The NIGC will not approve a management contract if a
director or a 5% Shareholder of the management company (i) is an elected member
of the Indian tribal government that owns the facility purchasing or leasing the
games; (ii) has been or is convicted of a felony gaming offense; (iii) has
knowingly and willfully provided materially false information to the NIGC or the
tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a
person whose prior history, reputation and associations pose a threat to the
public interest or to effective

5

gaming regulation and control, or create or enhance the chance of unsuitable
activities in gaming or the business and financial arrangements incidental
thereto.

In addition, the NIGC will not approve a management contract if the
management company or any of its agents have attempted to unduly influence any
decision or process of tribal government relating to gaming, or if the
management company has materially breached the terms of the management contract
or the tribe's gaming ordinance, or a trustee, exercising due diligence, would
not approve such management contract.

A management contract can be approved only after NIGC determines that the
contract provides, among other things, for (i) adequate accounting procedures
and verifiable financial reports, which must be furnished to the tribe; (ii)
tribal access to the daily operations of the gaming enterprise, including the
right to verify daily gross revenues and income; (iii) minimum guaranteed
payments to the tribe, which must have priority over the retirement of
development and construction costs; (iv) a ceiling on the repayment of such
development and construction costs; and (v) a contract term not exceeding five
years and a management fee not exceeding 30% of profits; provided that the NIGC
may approve up to a seven year term and a management fee not to exceed 40% of
profits if NIGC is satisfied that the capital investment required, and the
income projections for the particular gaming activity justify the larger profit
allocation and longer term.

IGRA established three separate classes of tribal gaming -- Class I, Class
II, and Class III. Class I includes all traditional or social games played by a
tribe in connection with celebrations or ceremonies. Class II gaming includes
games such as bingo, pulltabs, punch boards, instant bingo and card games that
are not played against the house. Class III gaming includes casino-style gaming
and includes table games such as blackjack, craps and roulette, as well as
gaming machines such as slots, video poker, lotteries, and pari-mutuel wagering.

IGRA prohibits substantially all forms of Class III gaming unless the tribe
has entered into a written agreement with the state in which the casino is
located that specifically authorizes the types of commercial gaming the tribe
may offer (a "tribal-state compact"). IGRA requires states to negotiate in good
faith with tribes that seek tribal-state compacts, and grants Indian tribes the
right to seek a federal court order to compel such negotiations. Many states
have refused to enter into such negotiations. Tribes in several states have
sought federal court orders to compel such negotiations under IGRA; however, the
Supreme Court of the United States held in 1996 that the Eleventh Amendment to
the United States Constitution immunizes states from suit by Indian tribes in
federal court without the states' consent.

Because Indian tribes are currently unable to compel states to negotiate
tribal-state compacts, Lakes may not be able to develop and manage casinos in
states that refuse to enter into, or renew, tribal-state compacts.

In addition to IGRA, tribal-owned gaming facilities on Indian land are
subject to a number of other federal statutes. The operation of gaming on Indian
land is dependent upon whether the law of the state in which the casino is
located permits gaming by non-Indian entities, which may change over time. Any
such changes in state law may have a material adverse effect on the casinos
managed by Lakes.

Title 25, Section 81 of the United States Code states that "no agreement
shall be made by any person with any tribe of Indians, or individual Indians not
citizens of the United States, for the payment or delivery of any money or other
thing of value . . . in consideration of services for said Indians relative to
their lands . . . unless such contract or agreement be executed and approved" by
the Secretary or his or her designee. An agreement or contract for services
relative to Indian lands that fails to conform with the requirements of Section
81 will be void and unenforceable. Any money or other thing of value paid to any
person by any Indian or tribe for or on his or their behalf, on account of such
services, in excess of any amount approved by the Secretary or his or her
authorized representative will be subject to forfeiture.

The Indian Trader Licensing Act, Title 25, Section 261-64 of the United
States Code ("ITLA") states that "any person other than an Indian of the full
blood who shall attempt to reside in the Indian country, or on any Indian
reservation, as a trader, or to introduce goods, or to trade therein, without
such license, shall forfeit all merchandise offered for sale to the Indians or
found in his possession, and shall moreover be liable to a penalty of $500. . ."
No such licenses have been issued to Lakes to date. The applicability of ITLA to
Indian gaming management contracts is unclear. Lakes believes that ITLA is not
applicable to its management

6

contracts, under which Lakes provides services rather than goods to Indian
tribes. Lakes further believes that ITLA has been superseded by IGRA.

Indian tribes are sovereign nations with their own governmental systems,
which have primary regulatory authority over gaming on land within the tribe's
jurisdiction. Because of their sovereign status, Indian tribes possess immunity
from lawsuits to which the tribes have not otherwise consented or otherwise
waived their sovereign immunity defense. Therefore, no contractual obligations
undertaken by tribes to Lakes would be enforceable by Lakes unless the tribe has
expressly waived its sovereign immunity as to such obligations. Courts strictly
construe such waivers. Lakes has obtained immunity waivers from each of the
tribes to enforce the terms of its management agreements, however, the scope of
those waivers has never been tested in court, and may be subject to dispute.
Additionally, persons engaged in gaming activities, including Lakes, are subject
to the provisions of tribal ordinances and regulations on gaming. These
ordinances are subject to review by NIGC under certain standards established by
IGRA.

NON-GAMING REGULATIONS

The Company and its subsidiaries are subject to certain federal, state and
local, safety and health laws, regulations and ordinances that apply to
non-gaming businesses generally, such as the Clean Air Act, Clean Water Act,
Occupational Safety and Health Act, Resource Conservation Recovery Act and the
Comprehensive Environmental Response, Compensation and Liability Act. The
Company believes that it is currently in material compliance with such
regulations. The coverage and attendant compliance costs associated with such
laws, regulations and ordinances may result in future additional cost to the
Company's operations.

EMPLOYEES

At March 19, 2002, Lakes had approximately 30 employees. Lakes believes its
relations with employees are positive.

RISK FACTORS

In addition to factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause actual results or
events to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.

THE CONSTRUCTION, OPERATION AND MANAGEMENT OF INDIAN CASINOS AND RESORTS REQUIRE
THE SATISFACTION OF VARIOUS CONDITIONS, MANY OF WHICH ARE BEYOND LAKES' CONTROL
AND THE FAILURE OF WHICH TO BE SATISFIED MAY SIGNIFICANTLY DELAY THE COMPLETION
OF LAKES' CURRENT INDIAN CASINO DEVELOPMENT PROJECTS OR PREVENT THE COMPLETION
OF SUCH PROJECTS ALTOGETHER.

Although Lakes and certain members of its management team have experience
developing, operating, and managing casinos owned by Indian tribes and located
on Indian land, neither the Company nor any of these individuals has developed
or operated a casino in either the State of California, the State of Michigan,
or on the east coast. In addition, the gaming industry in each of the locations
where Lakes plans to develop and operate casinos has a limited operating history
and faces several legal and procedural challenges that will need to be resolved
prior to the commencement of Lakes' development activities and the opening and
operation of the respective casinos.

The opening of each of the proposed Lakes' facilities in the State of
California, the State of Michigan, and on the east coast, will be contingent
upon, among other things, the completion of construction, hiring and training of
sufficient personnel and receipt of all regulatory licenses, permits,
allocations and authorizations. The scope of the approvals required to construct
and open these facilities will be extensive, and the failure to obtain such
approvals could prevent or delay the completion of construction or opening of
all or part of such facilities or otherwise affect the design and features of
the proposed casinos.

The start of development and construction of the casino projects is subject
to various regulatory approvals. No assurances can be given that once a schedule
for such construction and development activities is

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established, such development activities will begin or will be completed on
time, or any other time, or that the budget for these projects will not be
exceeded.

Major construction projects entail significant risks, including shortages
of materials or skilled labor, unforeseen engineering, environmental and/or
geological problems, work stoppages, weather interference, unanticipated cost
increases and non-availability of construction equipment. Construction,
equipment or delays or difficulties in obtaining any of the requisite licenses,
permits, allocations and authorizations from regulatory authorities could
increase the total cost, delay or prevent the construction or opening of any of
these planned casino developments or otherwise affect their design. In addition,
once developed, no assurances can be given that the Company will be able to
manage these casinos on a profitable basis or to attract a sufficient number of
guests, gaming customers and other visitors to make the various operations
profitable independently.

Although Lakes generally provides only preliminary construction financing
for its managed casinos, with each project Lakes is subject to the risk that its
investment may be lost if the project cannot obtain adequate financing to
complete development and open the casino successfully. In some cases, Lakes may
be forced to provide more financing than it originally planned in order to
complete development, increasing the risk to Lakes in the event of a default by
the casino.

BECAUSE LAKES CURRENTLY GENERATES NO REVENUE FROM CASINO MANAGEMENT CONTRACTS
WITH WHICH TO OFFSET THE INVESTMENT COSTS ASSOCIATED WITH ITS CASINO DEVELOPMENT
PROJECTS, DELAYS IN THE COMPLETION OF THESE DEVELOPMENT PROJECTS OR THE
NON-COMPLETION OF ANY SUCH PROJECT COULD MATERIALLY AND ADVERSELY AFFECT LAKES'
POTENTIAL FOR PROFITABILITY.

Since the expiration of its management contract for Grand Casino Coushatta
(the last remaining Lakes' managed Indian-owned casino) on January 16, 2002,
Lakes has generated no revenue from its casino management activities. Given the
absence of current casino management-related operating revenue with which to
offset the potentially significant investment costs associated with its current
or future casino development projects, delays in the completion of Lakes'
current development projects, or the failure of such projects to be completed at
all, may cause Lakes' operating results to fluctuate significantly and may
adversely affect Lakes' profitability. In addition, because Lakes' future growth
in revenues and its ability to generate profits will depend to a large extent on
Lakes' ability to increase the number of its managed casinos or develop new
business opportunities, the delays in the completion or the non-completion of
Lakes' current development projects may adversely affect Lakes' ability to
realize future growth in revenues and future profits.

PURSUANT TO THEIR TERMS, LAKES' CONTRACTS TO MANAGE CASINOS BEING DEVELOPED BY
LAKES ON INDIAN LAND CAN BE TERMINATED BY THE TRIBES UNDER CERTAIN
CIRCUMSTANCES, WHICH TERMINATION MAY HAVE A MATERIAL ADVERSE EFFECT ON THE
RESULTS OF LAKES' OPERATIONS.

The terms of Lakes' current management contracts provide that such
contracts may be terminated under circumstances, including without limitation,
upon the failure to obtain NIGC approval for the project, the loss of requisite
gaming licenses, or an exercise by a tribe of its buy-out option. Without the
realization of new business opportunities or new management contracts,
management contract terminations could have a material adverse effect on Lakes'
results of operations and financial conditions.

IF LAKES IS REQUIRED TO MAKE SIGNIFICANT ADDITIONAL PAYMENTS IN SATISFACTION OF
THE INDEMNIFICATION OBLIGATIONS LAKES INHERITED FROM GRAND CASINOS UPON LAKES'
FORMATION, THOSE PAYMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON LAKES' ASSET
POSITION.

Under the documents relating to Lakes' spin-off from Grand Casinos and
Grand Casinos' acquisition by Park Place, Lakes agreed to indemnify Grand
Casinos and affiliates of Grand Casinos for (i) liabilities of Grand Casinos
retained by Lakes in the spin-off, (ii) Grand Casinos' ongoing indemnification
obligations to current and former directors and officers of Grand Casinos and
(iii) contingent liabilities related to Stratosphere Corporation
("Stratosphere"). Lakes has previously entered into a settlement agreement
dispensing with both the Stratosphere shareholders' litigation and the Grand
Casinos, Inc. shareholders'

8

litigation, pursuant to which Lakes paid a total of $18.0 million to the Grand
Casinos, Inc. shareholders and the Stratosphere shareholders for full and final
settlement of all federal and state related actions. As described under Item 3
("Legal Proceedings"), there are currently a number of other litigation matters
for which Lakes has indemnification obligations to Grand Casinos. Until Lakes
has reached a final resolution with respect to these matters, there can be no
assurance that Lakes' indemnification obligations will not have a material
adverse effect on Lakes.

IF LAKES' CURRENT CASINO DEVELOPMENT PROJECTS ARE NOT COMPLETED OR, UPON
COMPLETION, FAIL TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE MARKET FOR
GAMING ACTIVITIES, LAKES MAY LACK THE FUNDS TO COMPETE FOR AND DEVELOP FUTURE
GAMING OR OTHER BUSINESS OPPORTUNITIES AND THE RESULTS OF LAKES' OPERATIONS MAY
SUFFER ACCORDINGLY.

The gaming industry is highly competitive. Gaming activities include
traditional land-based casinos; river boat and dockside gaming; casino gaming on
Indian land; state-sponsored lotteries and video poker in restaurants, bars and
hotels; pari-mutuel betting on horse racing, dog racing and jai alai; sports
bookmaking; and card rooms. The Indian-owned casinos managed by Lakes compete,
and will in the future compete, with all these forms of gaming, and will compete
with any new forms of gaming that may be legalized in additional jurisdictions,
as well as with other types of entertainment.

Lakes also competes with other gaming companies for opportunities to
acquire legal gaming sites in emerging and established gaming jurisdictions and
for the opportunity to manage casinos on Indian land. Many of Lakes' competitors
have more personnel and most have greater financial and other resources than
Lakes. Such competition in the gaming industry could adversely affect Lakes'
ability to attract customers and thus, adversely affect its operating results.
In addition, further expansion of gaming into new jurisdictions could also
adversely affect Lakes' business by diverting customers from its managed casinos
to competitors in such jurisdictions.

CHANGES IN THE LAWS, REGULATIONS, AND ORDINANCES (INCLUDING TRIBAL AND/OR LOCAL
LAWS) TO WHICH THE GAMING INDUSTRY IS SUBJECT, OR THE INABILITY OF LAKES, ITS
KEY PERSONNEL, SIGNIFICANT SHAREHOLDERS, OR JOINT VENTURE PARTNERS TO OBTAIN OR
RETAIN REQUIRED GAMING REGULATORY LICENSES, COULD PREVENT THE COMPLETION OF
LAKES' CURRENT CASINO DEVELOPMENT PROJECTS OR PREVENT LAKES FROM PURSUING FUTURE
DEVELOPMENT PROJECTS.

The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulations and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations, and often require such parties to obtain certain licenses, permits
and approvals.

The rapidly-changing political and regulatory environment governing the
gaming industry (including gaming operations which are conducted on Indian land)
makes it impossible for Lakes to accurately predict the effects that an adoption
of or changes in the gaming laws, regulations and ordinances will have on Lakes.
However, the failure of Lakes, or any of Lakes' key personnel, significant
shareholders or joint venture partners, to obtain or retain required gaming
regulatory licenses could prevent Lakes from expanding into new markets,
prohibit Lakes from generating revenues in certain jurisdictions, and subject
Lakes to sanctions and fines.

The political and regulatory environment in which Lakes is and will be
operating, including with respect to gaming activities on Indian land, is
discussed in greater detail in this Form 10-K under the caption "Regulation".

IF THE NIGC ELECTS TO MODIFY THE TERMS OF LAKES' MANAGEMENT CONTRACTS WITH
INDIAN TRIBES OR VOID SUCH CONTRACTS ALTOGETHER, LAKES' REVENUES FROM MANAGEMENT
CONTRACTS MAY BE REDUCED OR DISCONTINUED.

The NIGC has the power to require modifications to Indian management
contracts under certain circumstances or to void such contracts or ancillary
agreements including loan agreements if the management

9

company fails to obtain requisite approvals or to comply with applicable laws
and regulations. NIGC has the right to review each contract and has the
authority to reduce the term of a management contract or the management fee or
otherwise require modification of the contract, which could have an adverse
effect on Lakes. Currently, the management contracts (i) have not been reviewed
or approved by NIGC and (ii) NIGC could call them for review at any time, in
which case NIGC may not approve the contracts at all or may require modification
prior to granting approval.

IF INDIAN TRIBES TO WHICH LAKES HAS LOANED MONEY DEFAULT ON THEIR REPAYMENT
OBLIGATIONS OR WRONGFULLY TERMINATE THEIR MANAGEMENT CONTRACTS WITH LAKES, LAKES
WILL BE FORCED TO RELY ON REVENUES, IF ANY, FROM CASINO OPERATIONS AS RECOURSE
FOR COLLECTION OF INDEBTEDNESS OR MONEY DAMAGES AND, THEREFORE, LAKES MAY BE
UNABLE TO COLLECT THE AMOUNTS DUE.

Lakes has made, and will make, substantial loans to tribes for the
construction, development, equipment and operations of casinos managed by Lakes.
Lakes' only recourse for collection of indebtedness from a tribe or money
damages for breach or wrongful termination of a management contract is from
revenues, if any, from casino operations. Lakes has subordinated, and may in the
future subordinate, the repayment of these loans to a tribe and other
distributions due from a tribe (including management fees) in favor of other
obligations of the tribe to other parties related to the casino operations.
Accordingly, in the event of a default by a tribe under such obligations, Lakes'
loans and other claims against the tribe will not be repaid until such default
has been cured or the tribe's senior casino-related creditors have been repaid
in full.

A DETERIORATION OF THE COMPANY'S RELATIONSHIP WITH AN INDIAN TRIBE COULD CAUSE
DELAYS IN THE COMPLETION OF A CASINO DEVELOPMENT PROJECT WITH THAT TRIBE OR EVEN
FORCE THE COMPANY TO ABANDON A CASINO DEVELOPMENT PROJECT ALTOGETHER.

Good personal and professional relationships with Indian tribes and their
officials are critical to Lakes' proposed and future Indian-related gaming
operations and activities, including Lakes' ability to obtain, develop and
effectuate management and other agreements. As sovereign nations, Indian tribes
establish their own governmental systems under which tribal officials or bodies
representing a tribe may be replaced by appointment or election or become
subject to policy changes. Replacements of tribe officials or administrations,
or changes in policies to which a tribe is subject, may deteriorate the
Company's relationship with a tribe and lead to delays in the completion of a
development project with that tribe or prevent the project's completion
altogether, either of which will have an adverse effect on the results of the
Company's operations.

IF FUNDS FROM LAKES' OPERATIONS ARE INSUFFICIENT TO SUPPORT ITS CASH
REQUIREMENTS AND LAKES IS UNABLE TO OBTAIN ADDITIONAL FINANCING IN ORDER TO
SATISFY THESE REQUIREMENTS, EITHER ON TERMS ACCEPTABLE TO LAKES OR AT ALL, LAKES
MAY BE FORCED TO DELAY, SCALE BACK OR ELIMINATE SOME OF ITS EXPANSION AND
DEVELOPMENT GOALS, OR CEASE ITS OPERATIONS ENTIRELY.

Lakes anticipates that its reserves of cash, interest expected to be earned
on those reserves, and its anticipated revenues will be sufficient to finance
its operations. However, it is likely additional financing will be required to
complete one or more of its casino projects as soon as regulatory approvals are
received and construction can begin. There can be no assurance that Lakes will
not seek or require additional capital at some point in the future through
either public or private financings. Such financings may not be available when
needed on terms acceptable to Lakes or at all. Moreover, any additional equity
financings may be dilutive to Lakes' shareholders, and any debt financing may
involve additional restrictive covenants. An inability to raise such funds when
needed might require Lakes to delay, scale back or eliminate some of its
expansion and development goals, or might require Lakes to cease its operations
entirely. Lakes' financial condition and resources are discussed in greater
detail in Item 7. ("Management's Discussion and Analysis of Financial Condition
and Results of Operations of Lakes -- Capital Resources, Capital Spending and
Liquidity").

10

A LARGE PORTION OF LAKES' ASSETS ARE REPRESENTED BY NOTES RECEIVABLE FROM INDIAN
TRIBES AND OTHER PARTIES WITH VARYING DEGREES OF COLLECTION RISK, AND WITH
REPAYMENT OFTEN DEPENDENT ON THE OPERATING PERFORMANCE OF EACH GAMING PROPERTY.
IMPAIRMENT OF ONE OR MORE OF THESE LOANS COULD HAVE A SIGNIFICANT ADVERSE IMPACT
ON LAKES' FINANCIAL RESULTS.

At December 30, 2001, Lakes had $95.8 million in notes receivable, which
represented nearly 50% of its total assets. See Note 3 to the Consolidated
Financial Statements. Most of the notes receivable are advances made to Indian
tribes for financing related to gaming properties being developed, managed or
financed by Lakes. Other notes receivable relate to other business ventures in
which Lakes has participated. All of the notes are subject to varying degrees of
collection risk and there is no established market for any of the notes. For the
notes representing indebtedness of Indian tribes, the repayment terms are
specific to each tribe and are largely dependent upon the operating performance
of each gaming property. Repayments of such notes receivable are required to be
made only if distributable profits are available from the operation of the
related casinos. Repayments are also the subject of certain distribution
priorities specified in the management contracts. In addition, repayment of the
notes receivable and the manager's fees under the management contracts are
subordinated to certain other financial obligations of the respective tribes.

The fair value of the notes receivable may be lower than the carrying value
reflected in Lakes' balance sheet, and it is possible that one or more of the
loans will not be collectible, in whole or in part. Management periodically
evaluates the recoverability of its notes receivable based on the current and
projected operating results of the underlying facility or entity and historical
collection experience. No impairment losses on such notes receivable have been
recognized through December 30, 2001. If there are significant losses in the
future relating to impairment of value of the notes, this could have a material
adverse effect on Lakes' results of operations and financial condition. As
Lakes' casino projects begin construction or Lakes enters into new business
arrangements, Lakes expects to make additional advances to Indian tribes and
other parties in the future, which will be subject to the risks described above.

ENTRY INTO NEW BUSINESSES MAY RESULT IN FUTURE LOSSES.

Lakes has announced that part of its strategy involves diversifying into
other businesses. Such businesses involve business risks separate from the risks
involved in casino development and these investments may result in future losses
to Lakes. These risks include but are not limited to negative cash flow, initial
high development costs of new products and/or services without corresponding
sales pending receipt of corporate and regulatory approvals, market introduction
and acceptance of new products and/or services, and obtaining regulatory
approvals required to conduct the new businesses. There is no assurance that
diversification activities will successfully add to Lakes' future revenues and
income.

LAKES IS HEAVILY DEPENDENT ON THE ONGOING SERVICES OF ITS CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, LYLE BERMAN, THE LOSS OF WHOM WOULD HAVE A DETRIMENTAL EFFECT
ON THE PURSUIT OF LAKES' BUSINESS OBJECTIVE AND, CONSEQUENTLY, ITS PROFITABILITY
AND THE PRICE OF ITS STOCK.

Lakes' success will depend largely on the efforts and abilities of its
senior corporate management, particularly Lyle Berman, its Chairman and Chief
Executive Officer. The loss of the services of Mr. Berman or other members of
senior corporate management could have a material adverse effect on Lakes. Lakes
does not have an employment agreement with Mr. Berman.

UNTIL LAKES HAS SATISFIED ITS INDEMNIFICATION OBLIGATIONS RELATED TO GRAND
CASINOS, LAKES IS PROHIBITED FROM DECLARING DIVIDENDS ON ITS COMMON STOCK AND,
CONSEQUENTLY, THE ONLY RETURN ON INVESTMENT FOR LAKES' SHAREHOLDERS, IF ANY,
WILL OCCUR UPON THE SALE OF LAKES' STOCK.

So long as Lakes is required to indemnify Grand Casinos for certain
specified liabilities, including (i) contingent liabilities assumed by Lakes
under the Distribution Agreement, (ii) ongoing director and officer
indemnification obligations and (iii) contingent liabilities related to
Stratosphere, Lakes has agreed that it will not declare or pay any dividends,
make any distribution on account of Lakes' equity interests, or

11

otherwise purchase, redeem, defease or retire for value any equity interest in
Lakes, without the written consent of Park Place, which consent can be given or
withheld at Park Place's sole and absolute discretion.

ITEM 2. PROPERTIES

CORPORATE OFFICE FACILITY

Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned
to Lakes, and Lakes assumed a lease agreement dated February 1, 1996 covering
corporate office space of approximately 65,000 square feet with a lease term of
fifteen years. The lease commenced on October 14, 1996 and the annual base rent
was $768,300 plus building operating costs. During 2001, also pursuant to the
terms of the Distribution Agreement, Lakes entered into a capital lease
arrangement for the corporate office space. Accordingly, Lakes recorded a
capital leased asset and liability in the amount of approximately $5.8 million.
These amounts are included on the accompanying consolidated balance sheet as of
December 30, 2001. On January 2, 2002, as per the terms of the agreement with
Grand Casinos, Lakes purchased the building for $6.4 million. Lakes occupies
approximately 22,000 square feet of the building and has leased the remaining
space to outside tenants.

LAS VEGAS LAND

The Company owned, or held purchase options for, approximately sixteen
acres of land surrounding the corner of Harmon Avenue and Las Vegas Boulevard in
Las Vegas, Nevada. On July 31, 2000, Lakes announced that it had formed a joint
venture, Metroplex-Lakes LLC to develop the properties. On December 28, 2001,
the Company sold the Polo Plaza shopping center property to Metroflag Polo, LLC.
In conjunction with this sale, Lakes sold to Metroflag BP, LLC, rights to the
adjacent Travelodge property consisting of a long-term land lease and a motel
operation. The sale price for this combined transaction, which closed on
December 28, 2001, was approximately $30.9 million. Terms of the transaction
include a $1.0 million down payment, a note to Lakes in the amount of $23.3
million payable on September 30, 2002, and a second note payable to Lakes that
is non-interest bearing in the amount of $7.5 million due on June 30, 2004.
Lakes' collateral for the two notes is the property and lease rights described
above which would revert back to Lakes in the event of default by Metroflag. The
transaction was closed subject to certain administrative post-closing conditions
that must be satisfied within six months after the closing. If the conditions
are not satisfied or waived by Metroflag within the prescribed period, Metroflag
has the right to require Lakes to repurchase the properties.

Lakes continues to own the Shark Club property which is an approximate 3.4
acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. Lakes is currently in negotiations with a joint venture partner to
develop this site for an upscale time-share project. It is contemplated that
Lakes will contribute the property, valued at $16.0 million, and be required to
make no other material contributions of cash or property to the project. Lakes
has written down the Shark Club site to the estimated market value during the
fourth quarter of 2001. Further, the option to purchase the adjacent Cable
property for $39.1 million was allowed to lapse during 2001. As a result of
these transactions, a pre-tax loss on sale of land held for development in the
amount of $25.8 million was recorded in other income (expense) and a pre-tax
write-down of approximately $3.4 million was included in selling, general and
administrative expenses in the accompanying consolidated statement of loss for
the twelve months ended December 30, 2001.

ITEM 3. LEGAL PROCEEDINGS

The following summaries describe certain known legal proceedings to which
Grand Casinos is a party which Lakes has assumed, or with respect to which Lakes
has agreed to indemnify Grand Casinos, in connection with the Distribution.

SLOT MACHINE LITIGATION

In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-

12

ORL-22 -- in which various parties (including Grand Casinos) alleged to operate
casinos or be slot machine manufacturers were named as defendants. The plaintiff
sought to have the action certified as a class action.

A subsequently filed Action -- William Ahearn, et al v. Caesars World, Inc.
et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.

Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based
on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.

In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.

In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the
Schreier action were similar to those made by the plaintiffs in the Poulos and
Ahearn actions, except that Schreier claimed to represent a more precisely
defined class of plaintiffs than Poulos or Ahearn.

In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.

In March 1997, various defendants (including Grand Casinos) filed motions
to dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.

In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand Casinos has filed its answer to
the new complaint.

The plaintiffs have filed a motion seeking an order certifying the action
as a class action. Grand Casinos and certain of the defendants have opposed the
motion. The Court has not ruled on the motion.

STANDBY EQUITY COMMITMENT LITIGATION

In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.

The complaint alleges that Grand Casinos failed to perform under the
Standby Equity Commitment entered into between Stratosphere and Grand Casinos in
connection with Stratosphere's issuance of such first mortgage notes in March
1995. The complaint seeks an order compelling specific performance of what the
Trustee claims are Grand Casinos' obligations under the Standby Equity
Commitment.

The Stratosphere Trustee filed the complaint in its alleged capacity as a
third party beneficiary under the Standby Equity Commitment. Pursuant to the
Second Amended Plan, a new limited liability company (the "Stratosphere LLC")
was formed to pursue certain alleged claims and causes of action that
Stratosphere and other parties may have against numerous third parties,
including Grand Casinos and/or officers and/or directors of Grand Casinos. The
Stratosphere LLC has been substituted for IBJ Schroeder Bank & Trust Company,
Inc. in this proceeding.

In August 2000, the Court and the parties agreed to try the action upon an
amended joint pre-trial order and a series of post-trial briefs. Post-trial
briefing concluded on December 12, 2000 and oral argument was held on January
22, 2001. On April 4, 2001, the Court entered judgment in favor of Grand Casinos
and issued

13

its findings of fact and conclusions of law. The plaintiff filed an appeal with
the Ninth Circuit and filed its opening brief on November 23, 2001. Grand
Casinos filed its answering brief on January 11, 2002. The plaintiff filed its
reply brief on February 8, 2002, and the parties are awaiting the Ninth
Circuit's scheduling of the matter for oral argument.

STRATOSPHERE PREFERENCE ACTION

In April 1998, Stratosphere served on Grand Casinos and Grand Media &
Electronics Distributing, Inc., a wholly owned subsidiary of Grand Casinos
("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
recovery of certain amounts paid by Stratosphere to (i) Grand Casinos as
management fees and for costs and expenses under a management agreement between
Stratosphere and Grand Casinos, and (ii) Grand Media for electronic equipment
purchased by Stratosphere from Grand Media.

Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.

In May 1998, Grand Casinos responded to Stratosphere's complaint. That
response denies that Stratosphere is entitled to recover the amounts described
in the complaint. Discovery is now complete and the matter is scheduled for
trial on May 2, 2002.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Lakes became a publicly held company as a result of the Grand Distribution
effective December 31, 1998. The Common Stock began trading on the Nasdaq
National Market under the symbol LACO on January 4, 1999.

For the period from January 3, 2000 through December 30, 2001, the high and
low sales prices per share of the Company's Common Stock are indicated below, as
reported on the Nasdaq National Market:

On March 19, 2002, the last reported sale price for the Common Stock was
$7.15 per share. As of March 19, 2002, the Company had approximately 1,026
shareholders of record.

The Company has never paid any cash dividends with respect to its Common
Stock and the current policy of the Board of Directors is to retain any earnings
to provide for the growth of the Company. So long as Lakes is required to
indemnify Grand, as a subsidiary of Park Place, for certain specified
liabilities, Lakes has agreed that it will not declare or pay any dividends,
make any distribution on account of Lakes' equity interests or otherwise
purchase, redeem, defease or retire for value any equity interest in Lakes
without the written consent of Park Place which consent can be given or withheld
in Park Place's sole and absolute discretion. Subject to the foregoing dividend
restrictions, the payment of cash dividends in the future, if any, will be at
the discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements,

14

the Company's overall financial condition and any other factors deemed relevant
by the Board of Directors. See "Risk Factors -- Operating Covenants -- Dividend
Restrictions."

ITEM 6. SELECTED FINANCIAL DATA

The Selected Financial Data presented below should be read in conjunction
with the Financial Statements and notes thereto included elsewhere in this Form
10-K, and in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.

- ---------------

(1) 2001 includes $34.6 million in revenues from the management contract for
Grand Casino Coushatta that concluded January 16, 2002. 2000 includes $19.8
million in revenues from the management contract for Grand Casino Avoyelles
that concluded during 2000, including $16.0 million relating to the early
buyout of the agreement. 1998 results include $36.8 million in revenues from
the management contracts for Grand Casino Mille Lacs and Grand Casino
Hinckley that concluded during 1998.

(2) Includes non-recurring, non-cash charges totaling $29.2 million related to
the sale and write-down of certain land held for development in Las Vegas,
Nevada.

(3) Includes a non-recurring, non-cash $18.0 million provision for the Grand
Casinos/Stratosphere litigation settlement and a $5.5 million charge for the
write-off of unconsolidated affiliates.

(4) EBITDA is earnings before interest, taxes, depreciation and amortization,
which can be computed by adding depreciation and amortization to operating
income. EBITDA excludes the $29.2 million charge related to the sale and
write-down of certain land held for development in Las Vegas, Nevada in 2001
and the $18.0 million provision for the Grand Casinos/Stratosphere
litigation settlement and the $5.5 million write-off of unconsolidated
affiliates in 2000. EBITDA is presented supplementally because management
believes it allows for a more complete analysis of results of operations.
This information should not be considered as an alternative to any measure
of performance as promulgated under accounting principles generally accepted
in the United States (such as operating income or income from continuing
operations) nor should it be considered as an indicator of the overall
financial performance of Lakes. The calculations of EBITDA may be different
from the calculations used by other companies and, therefore, comparability
may be limited. Historical depreciation and amortization for Lakes for the
fiscal years

15

ended December 30, 2001, December 31, 2000, January 2, 2000, January 3, 1999
and December 28, 1997 totaled $1.0 million, $3.0 million, $2.0 million, $2.0
million, and $1.0 million, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Lakes Gaming, Inc., a Minnesota corporation ("Lakes" or the "Company") was
established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its Common Stock, to the shareholders of Grand Casinos,
Inc. ("Grand Casinos").

As a result of the Distribution, Lakes operates the Indian casino
management business and holds various other assets previously owned by Grand
Casinos. Lakes' main business is the development, construction and management of
casinos and related hotel and entertainment facilities in emerging and
established gaming jurisdictions. Lakes has entered into the following contracts
for the development, management and/or financing of new casino operations, all
of which are subject to various regulatory approvals before construction can
begin: (1) Lakes has a contract to be the exclusive developer and manager of an
Indian-owned gaming resort near New Buffalo, Michigan. (2) Lakes and another
company have formed partnerships with contracts to develop and manage two
casinos to be owned by Indian tribes in California, one near San Diego and the
other near Sacramento. (3) Lakes and another company have formed a partnership
with a contract to finance the construction of an Indian-owned casino 60 miles
north of San Francisco, California. (4) Lakes has also signed contracts with a
Massachusetts Indian tribe for development and management of a potential future
gaming resort in the eastern United States; however, this tribe has received a
negative finding regarding federal recognition from the Bureau of Indian Affairs
(BIA). The tribe has indicated that it will submit additional information for
reconsideration. See Item 1 -- "Business".

Lakes' historical revenues have been derived almost exclusively from
management fees. During 2001, Lakes managed a land-based, Indian-owned casino,
Grand Casino Coushatta, in Kinder, Louisiana ("Grand Casino Coushatta").
Pursuant to the Coushatta management contract, Lakes received a fee based on the
net distributable profits (as defined in the contracts) generated by Grand
Casino Coushatta. The management contract expired January 16, 2002, and will not
be renewed. This non-renewal will result in the loss of revenues to the Company
derived from such contract, which will have a material adverse effect on the
Company's results of operations.

The Company also managed a second land-based, Indian-owned casino in
Marksville, Louisiana ("Grand Casino Avoyelles"). On March 31, 2000, the Company
reached an agreement with the tribe for the early buyout of the management
contract for Grand Casino Avoyelles, which was scheduled to expire on June 3,
2001. The early buyout of the contract was provided for in the original
seven-year management agreement and, under the agreement, Lakes was compensated
for the management fees the company would have received had it managed Grand
Casino Avoyelles through the original contract expiration date of June 3, 2001,
discounted to their present value. Lakes was also repaid all amounts owing to it
under its loan agreements with the Tribe.

Lakes' limited operating history may not be indicative of Lakes' future
performance. In addition, a comparison of results from year to year may not be
meaningful due to the opening of new facilities during each year and the buy-out
and/or cessation of other casino management contracts. Lakes' growth strategy
contemplates the expansion of existing operations, the pursuit of opportunities
to develop and manage additional gaming facilities and the pursuit of new
business opportunities. The successful implementation of this growth strategy is
contingent upon the satisfaction of various conditions, including obtaining
governmental approvals, the impact of increased competition, and the occurrence
of certain events, many of which are beyond the control of Lakes.

16

The significant accounting policies, which Lakes believes are the most
critical to aid in fully understanding and evaluating its reported financial
results, include the following: revenue recognition and realizability of notes
receivable.

REVENUE RECOGNITION: Revenue from the management of Indian-owned casino
gaming facilities is recognized when earned according to the terms of the
management contracts. Currently all of the Indian-owned casino projects that
Lakes is involved with are in development stages and are not yet open.
Therefore, until a project is opened and operating, Lakes will not recognize
revenue related to Indian casino management.

REALIZABILITY OF NOTES RECEIVABLE: The Company's notes receivable from
Indian Tribes are generally for the development of gaming properties to be
managed by the Company. The repayment terms are specific to each tribe and are
largely dependent upon the operating performance of each gaming property.
Repayments of the notes receivable are required to be made only if distributable
profits are available from the operation of the related casinos. Repayments are
also the subject of certain distribution priorities specified in the management
contracts. In addition, repayment of the notes receivable and the manager's fees
under the management contracts are subordinated to certain other financial
obligations of the respective tribes. Through December 30, 2001, no amounts have
been withheld under these provisions. Management periodically evaluates the
recoverability of such notes receivable based on the current and projected
operating results of the underlying facility and historical collection
experience.

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto for the years ended
December 30, 2001, December 31, 2000 and January 2, 2000.

RESULTS OF OPERATIONS

Revenues are calculated in accordance with accounting principles generally
accepted in the United States and are presented in a manner consistent with
industry practice. Net distributable profits are computed using a modified cash
basis of accounting in accordance with the management contracts. The effect of
the use of the modified cash basis of accounting is to accelerate the write-off
of capital equipment and leased assets, which thereby impacts the timing of net
distributable profits.

FISCAL YEAR ENDED DECEMBER 30, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

Revenues. Total revenues were $34.9 million for the fiscal year ended
December 30, 2001, compared to $59.0 million for the same period in the prior
year. Revenues for the current year were derived from fees related to the
management of Grand Casino Coushatta. Revenues for the current year were less
than the same period last year primarily due to the early buyout of the
Company's management contract for Grand Casino Avoyelles by the Tunica-Biloxi
Tribe of Louisiana at the end of the first quarter 2000, pursuant to the terms
of the contract. Revenues from Grand Casino Avoyelles contributed $19.8 million
for the twelve months ended December 31, 2000, including approximately $16.0
million in management fee income recognized due to the buyout of the management
contract. The decrease in revenues relates also to a decline in management fees
of $4.2 million from Grand Casino Coushatta due to construction interruption on
the main roads leading to the casino, along with intensive marketing campaigns
implemented by casinos in the competitive Lake Charles market and adverse
weather conditions in the area.

The management contract for Grand Casino Coushatta expired January 16, 2002
and will not be renewed. This expiration will result in the loss of revenues to
the Company derived from such contract, which will have a material adverse
effect on the Company's results of operations. As of this filing, no revenues
are being derived from casinos.

Costs and Expenses. Total costs and expenses increased $2.0 million, to
$13.9 million for the year ended December 30, 2001, from $11.9 million for the
prior year. Selling, general and administrative expenses increased $3.6 million,
to $12.6 million for the year ended December 30, 2001 from $9.0 million for the
prior year. The increase primarily reflects the $3.4 million write-down of the
Shark Club property in Las Vegas to $16.0 million during 2001, as well as a
write-off of approximately $1.0 million in uncollectible loans relating to the
Paskenta project. The use of the Shark Club property is discussed below under
"Capital Resources,

17

Capital Spending and Liquidity". Depreciation and amortization expenses
decreased $1.6 million, to $1.3 million for the year ending December 30, 2001
from $2.9 million for the prior year, due to the early buyout of the Avoyelles
management contract in 2000.

Taxes. Benefit for income taxes was $0.2 million for the year ended
December 30, 2001, compared to a provision for income taxes of $12.9 million for
the prior year. The effective tax rates for 2001 and 2000 were 41.0% and 45.0%,
respectively.

Other. Loss on sale of land held for development was $25.8 million for the
year ended December 30, 2001. This amount includes losses incurred relating to
the sale of the Polo Plaza property in Las Vegas, Nevada as well as the sale of
the rights to the adjacent Travelodge property consisting of a long-term land
lease and a motel operation. These transactions are discussed below under
"Capital Resources, Capital Spending and Liquidity". The sale price for the
combined transaction, which closed on December 28, 2001, was approximately $30.9
million. This transaction and the lapsed option on the Cable property in Las
Vegas resulted in a pre-tax loss of approximately $25.8 million during 2001. In
the year ended December 31, 2000, there was a provision for litigation loss of
$18.0 million. This amount relates to a settlement agreement reached in June
2000 regarding both the Stratosphere shareholders' litigation and the Grand
Casinos, Inc. shareholders' litigation.

The settlement agreement required Lakes to pay a total of $18.0 million,
which has been reflected as a non-operating expense. This amount was paid into
escrow and related accounts in July 2000 for full and final settlement for all
federal and state related actions. Such amounts were included as restricted cash
on the accompanying consolidated balance sheet as of December 31, 2000. The
settlement agreement received final approval by the respective courts, and
distributions have been made in accordance with the settlement agreement.

In June 2001, Lakes entered into an agreement with New Horizon Kids Quest
(NHKQ), pursuant to which NHKQ would acquire Lakes' interest in NHKQ. As a
result, Lakes incurred a one-time write-down charge, included as write-down of
unconsolidated affiliates, of $0.7 million before tax, during 2001. For the 2000
year, the $5.5 million charge for the write-down of unconsolidated affiliates
reflects the carrying value at December 31, 2000 for certain assets held as
investments including securities in Fanball.com, Inc., Interactive Learning
Group, Inc. and Trak 21 Development, LLC. Interest income decreased $1.6 million
to $6.3 million for the fiscal year ended December 30, 2001 from $7.9 million
for the prior year, primarily due to the decline in market interest rates.
Equity in loss of unconsolidated affiliates was $0.5 million and $2.9 million
for the years ending December 30, 2001 and December 31, 2000, respectively, the
current year decrease is the result of the write-off of investments in
Fanball.com, Interactive Learning Group and Trak 21 at the end of 2000.

Earning (Loss) per Common Share and Net Earnings (Loss). For the fiscal
year ended December 30, 2001 basic and diluted losses per common share were
$0.03. This compares to basic and diluted earnings per common share of $1.47 for
the fiscal year ended December 31, 2000. Earnings decreased from $15.7 million
for the fiscal year ended December 31, 2000 to a loss of $0.3 million for the
fiscal year ended December 30, 2001.

Outlook. Except for fees earned from the management of Grand Casino
Coushatta through January 16, 2002, it is currently contemplated that there will
be no additional operating revenues for the remainder of 2002. Although none of
the existing casino development projects are expected to produce revenue in
2002, Lakes continues to evaluate potential new revenue-generating business
opportunities. Lakes continues to closely monitor its operating expenses. The
Company's strong cash position is considered adequate to cover expected 2002
operating expenses.

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 2,
2000

Revenues. Total revenues were $59.0 million for the fiscal year ended
December 31, 2000, compared to $54.7 million for the prior year. Aggregate
management fee income from the Avoyelles and Coushatta casinos increased to
approximately $58.6 million during the twelve months ended December 31, 2000
from $54.7 million in the previous year. Contributing to the increase of $3.9
million was the early buyout of the

18

management agreement for Grand Casino Avoyelles by the Tunica-Biloxi Tribe of
Louisiana in the first quarter of 2000. Under the early buyout agreement, the
Company was compensated for the management fees it would have received had it
managed Grand Casino Avoyelles through the original contract expiration date
which was June 3, 2001. As a result, management fee income from Grand Casino
Avoyelles increased approximately $5.6 million for the twelve months ended
December 31, 2000 compared to the prior year. Also, despite a 5.0% increase in
total revenue at Grand Casino Coushatta, management fee income decreased
approximately $1.7 million for the twelve months ended December 31, 2000
compared to the twelve months ended January 2, 2000. This decrease is primarily
due to increased marketing and employee benefit costs at Grand Casino Coushatta.

As a result of the early buyout of the management agreement for Grand
Casino Avoyelles, the Company's revenues and earnings will not include
contributions from this operation going forward.

Costs and Expenses. Total costs and expenses increased $2.3 million, to
$11.9 million for the year ended December 31, 2000, from $9.6 million for the
prior year. Selling, general and administrative expenses increased $1.3 million,
to $9.0 million for the year ended December 31, 2000 from $7.7 million for the
prior year. The increase primarily reflects development costs relating to new
casino projects. Depreciation and amortization expenses increased $1.0 million,
to $2.9 million for the year ending December 31, 2000 from $1.9 million for the
prior year, due to increased amortization in the current year related to the
early buyout of the Avoyelles management contract.

Taxes. Provision for income taxes was $12.9 million for the year ended
December 31, 2000, compared to $22.1 million for the prior year. The effective
tax rates for 2000 and 1999 were 45.0% and 43.4%, respectively. The
reconciliation of the statutory federal tax rate of 35.0%, to the Company's
actual rate for each of the years is state income taxes, net of the federal
income tax benefit of 6.0%, and permanent differences in book to tax income of
4.0% and 2.4% for 2000 and 1999, respectively.

Other. Provision for litigation loss was $18.0 million for the year ended
December 31, 2000. This amount relates to a settlement agreement reached in June
2000 regarding both the Stratosphere shareholders' litigation and the Grand
Casinos, Inc. shareholders' litigation. The agreement required Lakes to pay a
total of $18.0 million, which has been reflected as a non-operating expense.
This amount was paid into escrow and related accounts in July 2000 for full and
final settlement for all federal and state related actions. Such amount is
included as restricted cash on the accompanying consolidated balance sheet as of
December 31, 2000. The settlement agreement is subject to final approval by the
respective courts.

The $5.5 million charge for the write down of unconsolidated affiliates
reflects the carrying value at December 31, 2000 for certain assets held as
investments including securities in Fanball.com, Inc., Interactive Learning
Group, Inc. and Trak 21 Development, LLC. Interest income increased $0.3 million
to $7.9 million for the fiscal year ended December 31, 2000 from $7.6 million
for the prior year, primarily due to interest earned on additional notes
receivable, partially offset by the early extinguishment of notes from the
Avoyelles casino and decreased cash balances. Equity in loss of unconsolidated
affiliates was $2.9 million for each of the years ending December 31, 2000 and
January 2, 2000, due primarily to losses of Fanball.com, Interactive Learning
Group and Trak 21 before these investments were written down in 2000.

Earnings per Common Share and Net Earnings. For the fiscal year ended
December 31, 2000 basic and diluted earnings per common share were $1.47 and
$1.47, respectively. This compares to basic and diluted earnings per common
share of $2.72 and $2.67, respectively, for the fiscal year ended January 2,
2000. Earnings decreased from $28.8 million for the fiscal year ended January 2,
2000 to $15.7 million for the fiscal year ended December 31, 2000.

CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY

At December 30, 2001 Lakes had $51.8 million in restricted and unrestricted
cash and cash equivalents. The Company also had $2.0 million in short-term,
available-for-sale investments, consisting primarily of a fixed income portfolio
made up of various types of bonds which are rated A1 or better. The cash and
short-term investment balances are planned to be used for loans to current joint
venture and tribal partners to

19

develop existing and anticipated Indian casino operations, the pursuit of
additional business opportunities, and settlement of pending litigation matters.
The amount and timing of Lakes' cash outlays for casino development loans will
depend on the timing of the regulatory approval process and the availability of
external financing. When approvals are received, additional financing will be
needed to complete the projects. It is currently planned that this third-party
financing will be obtained by each individual tribe. However, there can be no
assurance that if third-party financing is not available, Lakes will not be
required to finance these projects directly. If Lakes must provide this
financing, Lakes expects to obtain debt or equity financing which it would loan
to the respective tribes as necessary. As part of a recently announced letter of
intent to invest in a joint venture which would televise poker tournaments, the
Company would be required to invest $0.1 million for an approximately 78%
ownership position in the joint venture. The Company would also be required to
loan up to $3.2 million to the joint venture as needed.

For the years ended December 30, 2001, December 31, 2000 and January 2,
2000, net cash provided by operating activities totaled $34.9 million, $35.1
million and $36.5 million, respectively. For the same periods, net cash utilized
in investing activities totaled $2.2 million, $49.1 million and $69.3 million.
Included in these investing activities for the years ended December 30, 2001,
December 31, 2000 and January 2, 2000 are proceeds primarily from repayment of
notes receivable from Indian-owned casinos of $16.7 million, $18.0 million and
$12.0 million, respectively. Also, during these periods, payments for land held
for development amounted to $13.6 million, $3.9 million and $22.9 million,
respectively.

As a part of the agreements resulting from Lakes' spin-off from Grand
Casinos and related transactions, Lakes has agreed to indemnify Grand Casinos
against all costs, expenses and liabilities incurred in connection with or
arising out of certain pending and threatened claims and legal proceedings to
which Grand Casinos and certain of its subsidiaries are likely to be parties.
The Company's indemnification obligations include the obligation to provide the
defense of all claims made in proceedings against Grand Casinos and to pay all
related settlements and judgments. See Item 3. Legal Proceedings.

As security to support Lakes' indemnification obligations to Grand Casinos,
Lakes agreed to deposit, in trust for the benefit of Grand Casinos, as a wholly
owned subsidiary of Park Place, an aggregate of $30 million, consisting of four
annual installments of $7.5 million, on each annual anniversary of the spin-off.
Lakes' ability to satisfy this funding obligation is materially dependent upon
the continued success of its operations and the general risks inherent in its
business. In the event Lakes is unable to satisfy its funding obligation, it
would be in breach of its agreement with Grand Casinos, possibly subjecting
itself to additional liability for contract damages, which could have a material
adverse effect on Lakes' business and results of operations. The Company made
the first deposit of $7.5 million on December 31, 1999. In 2000, Lakes deposited
$18.0 million into an escrow account on behalf of the recipients in the
Stratosphere shareholders' litigation and the Grand Casinos, Inc. shareholders'
litigation. Such amounts are included as restricted cash on the accompanying
consolidated balance sheets as of January 2, 2000 and December 31, 2000. As the
$18.0 million was paid out during 2001, the remaining deposit of $7.5 million is
included as restricted cash on the accompanying balance sheet as of December 30,
2001. In January 2001, Lakes also purchased the Shark Club property in Las Vegas
for $10.1 million in settlement of another claim that was subject to the
indemnification obligations.

On December 28, 2001, the Company sold the Polo Plaza shopping center
property to Metroflag Polo, LLC. In conjunction with this sale, Lakes sold to
Metroflag BP, LLC, rights to the adjacent Travelodge property consisting of a
long-term land lease and a motel operation. The sale price for this combined
transaction was approximately $30.9 million. Terms of the transaction include a
$1.0 million down payment, a note to Lakes in the amount of $23.3 million
payable on September 30, 2002, and a second note payable to Lakes that is
non-interest bearing in the amount of $7.5 million due on June 30, 2004. Lakes'
collateral for the two notes is the property and lease rights described above
which would revert back to Lakes in the event of default by Metroflag. The
transaction was closed subject to certain administrative post-closing conditions
that must be satisfied within six months after the closing. If the conditions
are not satisfied or waived by Metroflag within the prescribed period, Metroflag
has the right to require Lakes to repurchase the properties.

20

In addition to the notes receivable from Metroflag, Lakes also has
approximately $65.0 million in notes receivable from Indian tribes and other
parties. Most of these amounts are advances made to the tribes for the
development of gaming properties managed by Lakes. See Note 3 to the
Consolidated Financial Statements.

Lakes continues to own the Shark Club property which is an approximate 3.4
acre undeveloped site adjacent to the Polo Plaza shopping center and Travelodge
sites. Lakes is currently in negotiations with a joint venture partner to
develop this site for an upscale time-share project. It is contemplated that
Lakes will contribute the property, valued at $16.0 million, and be required to
make no other material contributions of cash or property to the project. Lakes
has written down the Shark Club site to the estimated market value during the
fourth quarter of 2001. As a result of this write-down, the Company incurred a
pre-tax operating write-down of approximately $3.4 million. Further, the sale of
the Polo Plaza property in Las Vegas, Nevada, the sale of the rights to the
adjacent Travelodge property consisting of a long-term land lease and a motel
operation, and the lapsed option on the adjacent Cable property during 2001
resulted in a pre-tax loss of approximately $25.8 million.

Notes receivable from the Coushatta Tribe of Louisiana were $12.2 million
at December 31, 2000 and $0.1 million at December 30, 2001. The outstanding
balance was repaid at the conclusion of the management agreement on January 16,
2002. In addition, Lakes was previously the guarantor of a loan agreement
entered into by the Coushatta Tribe in the amount of $25.0 million, with a
balance of $6.8 million outstanding at December 30, 2001. Lakes was released
from the guaranty agreement on January 16, 2002.

On January 2, 2002, the Company completed the purchase of its corporate
office building in Minnetonka, Minnesota. This transaction resulted in the
extinguishment of the Company's capital lease obligation related to the
building.

OBLIGATIONS

The Company has two notes payable with third parties. The first is
collateralized by certificates of deposit, with $1.0 million outstanding at
December 30, 2001 and December 31, 2000. Interest is compounded and paid on a
quarterly basis at 10%. The principal and any unpaid interest are due December
22, 2002. The second is collateralized by property with $0.4 million outstanding
at December 30, 2001. Interest is compounded and paid on a quarterly basis at
8.5%. The principal and any unpaid interest are due October 9, 2002.

Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned
to Lakes, and Lakes assumed, a lease agreement dated February 1, 1996 covering
Lakes' current corporate office space of approximately 65,000 square feet with a
lease term of fifteen years. The lease commenced on October 14, 1996. During
2001, also pursuant to the terms of the Distribution Agreement, Lakes entered
into a capital lease arrangement for the corporate office space at which time
the operating lease was cancelled. Accordingly, Lakes recorded a capital leased
asset and liability in the amount of approximately $5.8 million. These amounts
are included on the accompanying consolidated balance sheet as of December 30,
2001. On January 2, 2002, as per the agreement with Grand Casinos, Lakes
purchased the building.

SEASONALITY

The Company believes that the operations of all casinos to be managed by
the Company will be affected by seasonal factors, including holidays, weather
and travel conditions.

REGULATION AND TAXES

The Company is subject to extensive regulation by state gaming authorities.
The Company will also be subject to regulation, which may or may not be similar
to current state regulations, by the appropriate authorities in any jurisdiction
where it may conduct gaming activities in the future. Changes in applicable laws
or regulations could have an adverse effect on the Company.

The gaming industry represents a significant source of tax revenues. From
time to time, various federal legislators and officials have proposed changes in
tax law, or in the administration of such law, affecting the

21

gaming industry. It is not possible to determine the likelihood of possible
changes in tax law or in the administration of such law. Such changes, if
adopted, could have a material adverse effect on the Company's results of
operations and financial results.

PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
integrated Form 10-K/Annual Report and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain statements that are forward-looking, such as plans for
future expansion and other business development activities as well as other
statements regarding capital spending, financing sources and the effects of
regulation (including gaming and tax regulation) and competition.

Such forward looking information involves important risks and uncertainties
that could significantly affect the anticipated results in the future and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company.

These risks and uncertainties include, but are not limited to, those
relating to possible delays in completion of Lakes' casino projects, including
various regulatory approvals and numerous other conditions which must be
satisfied before completion of these projects; possible termination or adverse
modification of management contracts; continued indemnification obligations to
Grand Casinos; highly competitive industry; possible changes in regulations;
reliance on continued positive relationships with Indian tribes and repayment of
amounts owed to Lakes by Indian tribes; possible need for future financing to
meet Lakes' expansion goals; risks of entry into new businesses; and reliance on
Lakes' management. For further information regarding the risks and
uncertainties, see the "Business -- Risk Factors" section of this Annual Report
on Form 10-K for the fiscal year ended December 30, 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's financial instruments include cash and cash equivalents,
marketable securities and long-term debt. The Company's main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on its investment portfolio. Consequently, the Company invests
with only high-credit-quality issuers and limits the amount of credit exposure
to any one issuer. The Company does not use derivative instruments for
speculative or investment purposes.

The Company's cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these instruments. As of
December 30, 2001, the carrying value of the Company's cash and cash equivalents
approximates fair value. The Company's marketable debt securities (principally
consisting of commercial paper, corporate bonds, and government securities) have
a weighted average duration of one year or less. Consequently, such securities
are not subject to significant interest rate risk.

The Company's primary exposure to market risk associated with changes in
interest rates involves the Company's notes receivable related to loans for the
development and construction of Native American owned casinos. The loans and
related note balances earn various interest rates based upon a defined reference
rate. If interest rates rise or fall, the floating rate receivables may generate
more or less interest income than what is currently recorded. As of December 30,
2001, Lakes had $61.5 million of floating rate notes receivables. Based on the
applicable current reference rates and assuming all other factors remain
constant, interest income for a twelve-month period would be $3.8 million. A
reference rate increase of 100 basis points would result in an increase in
interest income of $0.6 million. A 100 basis point decrease in the reference
rate would result in a decrease of $0.6 million in interest income over the same
twelve-month period.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

LAKES GAMING, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

23

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Lakes Gaming, Inc.:

We have audited the accompanying consolidated balance sheets of Lakes
Gaming, Inc. (a Minnesota corporation) and Subsidiaries as of December 30, 2001
and December 31, 2000 and the related consolidated statements of earnings
(loss), comprehensive earnings (loss), shareholders' equity and cash flows for
each of the three years in the period ended December 30, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakes
Gaming, Inc. and Subsidiaries as of December 30, 2001 and December 31, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2001, in conformity with accounting principles
generally accepted in the United States.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
January 25, 2002

24

LAKES GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated balance
sheets.
25

LAKES GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial
statements.
26

LAKES GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 30, 2001,
DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
27

LAKES GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
28

LAKES GAMING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
29

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2001, DECEMBER 31, 2000, AND JANUARY 2, 2000

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Lakes Gaming, Inc., a Minnesota corporation ("Lakes" or the "Company") was
established as a public corporation on December 31, 1998, via a distribution
(the "Distribution") of its common stock, par value $.01 per share (the "Common
Stock") to the shareholders of Grand Casinos, Inc. ("Grand Casinos"). Pursuant
to the terms of a Distribution Agreement entered into between Grand Casinos and
Lakes and dated as of December 31, 1998 (the "Distribution Agreement"), Grand
Casinos shareholders received .25 of one share of Lakes Common Stock for each
share held in Grand Casinos.

Immediately following the Distribution, Grand Casinos merged with a
subsidiary of Park Place Entertainment Corporation, a Delaware corporation
("Park Place"), pursuant to which Grand Casinos became a wholly owned subsidiary
of Park Place (the "Merger"), Grand Casinos shareholders received one share of
Park Place common stock in the Merger for each share they held in Grand Casinos.
The merger and distribution received all necessary shareholder and regulatory
approvals and was completed on December 31, 1998. Grand Casinos obtained a
ruling from the Internal Revenue Service (IRS) that the Distribution qualified
as a tax-free transaction, solely with respect to Grand Casinos shareholders
except to the extent that Grand Casinos shareholders received cash in lieu of
fractional shares.

During 2001, Lakes managed the largest casino resort in Louisiana and has
entered into development and management agreements with four separate tribes for
four new casino operations, one in Michigan, two in California, and one with the
Nipmuc Nation on the east coast. The Company also has agreements for the
development of a casino on Indian owned land in California through a joint
venture.

MANAGEMENT CONTRACTS OF LIMITED DURATION

The ownership, management and operation of gaming facilities are subject to
extensive federal, state, provincial, tribal and/or local laws, regulation, and
ordinances, which are administered by the relevant regulatory agency or agencies
in each jurisdiction. These laws, regulations and ordinances vary from
jurisdiction to jurisdiction, but generally concern the responsibility,
financial stability and character of the owners and managers of gaming
operations as well as persons financially interested or involved in gaming
operations. The Company is prohibited by the Indian Gaming Regulatory Act from
having an ownership interest in any casino it manages for Indian tribes.

The Company reached an agreement with the Tunica-Biloxi Tribe of Louisiana,
effective March 31, 2000, for the early buyout of the management contract for
Grand Casino Avoyelles. The Tunica-Biloxi Tribe of Louisiana elected to exercise
its option for the early buyout of the contract, which was scheduled to expire
on June 3, 2001. The early buyout of the contract was provided for in the
original seven-year management agreement and, under the agreement, Lakes was
compensated for the management fees the Company would have received had it
managed Grand Casino Avoyelles through the original contract expiration date of
June 3, 2001, discounted to their present value. Included in management fee
income for the year ended December 31, 2000 is approximately $16.0 million
relating to the early buyout. Lakes was also repaid all amounts owing to it
under its loan agreements with the Tribe. The management contract for Grand
Casino Coushatta expired January 16, 2002, which is seven years from the date
the casino opened, and was not renewed. This expiration will result in the loss
of revenues to the Company derived from such contract, which will have a
material adverse effect on the Company's results of operations. As of December
30, 2001, the Company has no other management contracts from which it will
derive revenues in 2002.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. During the reporting period, the most
significant estimates relate to revenue recognition and realizability of notes
receivable. Ultimate results could differ from those estimates.

YEAR END

The Company has a 52- or 53-week accounting period ending on the Sunday
closest to December 31 of each year. The Company's fiscal years for the periods
shown on the accompanying consolidated statements of earnings ended on December
30, 2001 (2001), December 31, 2000 (2000), and January 2, 2000 (1999).

PRINCIPLES OF CONSOLIDATION

The accompanying audited and consolidated financial statements include the
accounts of Lakes and its wholly-owned and majority-owned subsidiaries.
Investments in unconsolidated affiliates representing between 20% and 50% of
voting interests are accounted for on the equity method. All material
intercompany balances and transactions have been eliminated in consolidation.

Lakes' investments in unconsolidated affiliates include a 50 percent
ownership interest in PCG Santa Rosa, LLC, a joint venture formed to develop a
casino on Indian-owned land in California. Additionally, as a result of its
spin-off from Grand Casinos, Lakes received a 27 percent ownership interest in
New Horizon Kids Quest, Inc. (NHKQ), a publicly held provider of child care
facilities. In June 2001, Lakes entered into an agreement with NHKQ, pursuant to
which NHKQ would acquire Lakes' interest in NHKQ. As a result of this
transaction, Lakes incurred a one-time write-down charge of $0.7 million before
tax, during the second quarter of 2001. On December 31, 2000, Lakes wrote off
the carrying value, in the amount of $5.5 million, of certain investments in
unconsolidated affiliates. The investments include Fanball.com, Inc., a start-up
internet provider of fantasy sports services, Trak 21 Development, LLC, a
developer of player tracking systems for the casino industry, and Interactive
Learning Group, Inc., a consumer products company.

REVENUE AND EXPENSES

Revenue from the management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the management contracts.

The operating expenses of the Company include the costs associated with the
management of all gaming operations for which the Company has a management
contract. Such amounts represent the direct cost of providing assistance in the
areas of casino operations, food and beverage operations, marketing and
promotion, customer service, accounting, legal and other functions.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on hand and in banks,
interest-bearing deposits, money market funds and other instruments with
original maturities of three months or less. Restricted cash and cash
equivalents consist primarily of funds deposited as security to support Lakes'
indemnification obligations to Grand Casinos under each of the Distribution
Agreement and the Merger Agreement, and funds designated as collateral relating
to land held for development. Cash and cash equivalents are stated at cost which
approximates fair value.

SHORT-TERM INVESTMENTS

The Company follows the provisions of Statement on Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and has classified all of its investments (except restricted cash
reserves) as available for sale, whereby investments are reported at fair value,
with

31

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unrealized gains and losses reported as accumulated other comprehensive earnings
(loss), net of income taxes, in the accompanying consolidated statements of
shareholders' equity. Market value is determined by the most recently traded
price of the security at the balance sheet date. Net realized gains or losses
are determined on the specific identification cost method.

Included in the table below are available-for-sale securities that do not
have a single maturity date. These available-for-sale securities have maturities
over five years and less than ten years based on the securities' final maturity
dates. As of December 30, 2001 and December 31, 2000, the cost basis, fair
value, and unrealized losses of the Company's investments consist of the
following (in thousands):

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals, and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred. Depreciation and
amortization of property and equipment is computed using the straight-line
method over the following estimated useful lives:

Building.................................................... 40 years
Leasehold improvements...................................... 15 years
Furniture and equipment..................................... 3-10 years

Property and Equipment consist of the following (in thousands):

The Company periodically evaluates whether events and circumstances have
occurred that may affect the recoverability of the net book value of its
long-lived assets. If such events or circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset. If the sum of the expected
future undiscounted cash flows does not exceed the carrying value of the asset,
the Company will recognize an impairment loss.

LAND HELD FOR DEVELOPMENT

At December 30, 2001, land held for development consists of amounts related
to an approximate 3.4 acre site in Las Vegas, Nevada, which the Company owns.
Lakes is currently in negotiations with a joint venture partner to develop this
site for an upscale time-share project. As a result of these negotiations, it is
contemplated that Lakes will contribute the property, valued at $16.0 million,
and be required to make no

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

additional material contributions of cash or property to the project. Lakes
wrote down the Shark Club site to the $16.0 million market value from $19.4
million during 2001. As a result of this write-down, the Company incurred a
pre-tax operating write-down of approximately $3.4 million, which is reflected
in selling, general and administrative expenses in the accompanying consolidated
statement of loss. On December 28, 2001, the Company sold the Polo Plaza
shopping center property to Metroflag Polo, LLC. In conjunction with this sale,
Lakes sold to Metroflag BP, LLC, rights to the adjacent Travelodge property
consisting of a long-term land lease and a motel operation. The sale price for
this combined transaction was approximately $30.9 million.

Terms of the transaction include a $1.0 million down payment, a note to
Lakes in the amount of $23.3 million payable on September 30, 2002, and a second
non-interest bearing note payable to Lakes in the amount of $7.5 million due on
June 30, 2004. Lakes' collateral for the two notes is the property and lease
rights described above which would revert back to Lakes in the event of default
by Metroflag. The transaction was closed subject to certain administrative
post-closing conditions that must be satisfied within six months after the
closing. If the conditions are not satisfied or waived by Metroflag within the
prescribed period, Metroflag has the right to require Lakes to repurchase the
properties. Further, the option to purchase the adjacent Cable property for
$39.1 million was allowed to lapse during 2001. As a result of these
transactions, a pre-tax loss on sale of land held for development and pre-tax
write-off related to the lapsed option on the Cable property in the amount of
$25.8 million is included in the accompanying consolidated statement of loss for
the twelve months ended December 30, 2001.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company classifies
deferred tax liabilities and assets into current and non-current amounts based
on the classification of the related assets and liabilities.

INTEREST INCOME

Interest income represents interest on the notes receivable from Indian
tribes and interest on cash, cash equivalents and short-term investments.
Interest on the notes receivable is recorded as earned based on contractual
rates of interest. Realizability of accrued interest on notes receivable is
contingent upon the opening of the related casinos. Management periodically
evaluates the recoverability of such notes receivable based on the current and
projected operating results of the underlying facility and historical collection
experience. No impairment losses on such notes receivable have been recognized
through December 30, 2001. Interest on cash, cash equivalents and short-term
investments reflects interest income realized from investments in savings and
money market accounts and other short-term liquid investments.

EARNINGS PER SHARE

For all periods, basic earnings per share (EPS) is calculated by dividing
earnings (loss) by the weighted average common shares outstanding. Diluted EPS
reflects the potential dilutive effect of all common stock equivalents
outstanding by dividing net earnings (loss) by the weighted average of all
common and dilutive shares outstanding. Stock options that could potentially
dilute earnings (loss) per share in the future of 2,486,343 and 867,268 in 2001
and 2000, respectively, were not included in the computation of diluted earnings
(loss) per share because to do so would have been anti-dilutive for the periods
presented.

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONCENTRATIONS OF CREDIT RISK

The financial instruments that subject the Company to concentrations of
credit risk consist principally of accounts and notes receivable. Notes
receivable are due primarily from the Pokagon Band of Potawatomi Indians,
Metroflag Polo, LLC, and the Shingle Springs Band of Miwok Indians.

ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Implementation of SFAS 133 was required as of the
beginning of fiscal year 2001 and had no material effect on the Company's
financial position or results of operations.

RECLASSIFICATIONS

Certain amounts in the 2000 and 1999 consolidated financial statements have
been reclassified to conform to the 2001 presentation. These reclassifications
had no effect on previously reported net earnings or shareholders' equity.

2. MANAGEMENT CONTRACTS FOR INDIAN-OWNED CASINOS:

The Company held a management contract with the Coushatta Tribe of
Louisiana for a gaming facility in Kinder, Louisiana, that expired on January
16, 2002, which is seven years from the date the casino opened, and was not
renewed. Substantially, all of the Company's revenues were derived from this
contract during 2001. This expiration will result in the loss of revenues to the
Company derived from such contract, which will have a material adverse effect on
the Company's results of operations.

The Company reached an agreement with the Tunica-Biloxi Tribe of Louisiana,
effective March 31, 2000, for the early buyout of the management contract for
Grand Casino Avoyelles. The Tunica-Biloxi Tribe of Louisiana elected to exercise
its option for the early buyout of the contract, which was scheduled to expire
June 3, 2001.

The early buyout of the contract was provided in the original seven-year
management agreement and the Company received full value for all contracted
obligations by the Tunica-Biloxi Tribe of Louisiana. Under the early buyout
agreement, the Company was compensated for the management fees, discounted to
present value, the Company would have received had it managed Grand Casino
Avoyelles through the original contract expiration date. 2000 results include
$19.8 million in revenues from the management contract for Grand Casino
Avoyelles, including $16.0 million related to the early buy-out of the
agreement. The Company's revenues and earnings will not include contribution
from this operation going forward.

The management contracts govern the relationship between the Company and
the tribes with respect to the construction and management of the casinos. The
construction or remodeling portion of the agreements commenced with the signing
of the respective contracts and continued until the casinos opened for business;
thereafter, the management portion of the respective management contracts
continues for a period up to seven years. Under the terms of the contracts, the
Company, as manager of the casino, receives a percentage of the distributable
profits (as defined in the contract) of the operations as a management fee after
payment of certain priority distributions, a cash contingency reserve, and
guaranteed minimum payments to the Tribes.

34

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. NOTES RECEIVABLE

The notes receivable from Indian Tribes are generally for the development
of gaming properties to be managed by the Company. The repayment terms are
specific to each tribe and are largely dependent upon the operating performance
of each gaming property. Repayments of the aforementioned notes receivable are
required to be made only if distributable profits are available from the
operation of the related casinos. Repayments are also the subject of certain
distribution priorities specified in the management contracts. In addition,
repayment of the notes receivable and the manager's fees under the management
contracts are subordinated to certain other financial obligations of the
respective tribes. Through December 30, 2001, no amounts have been withheld
under these provisions.

The terms of Lakes' current management contracts provide that such
contracts may be terminated under circumstances, including without limitation,
upon the failure to obtain NIGC approval for the project, the loss of requisite
gaming licenses, or an exercise by a tribe of its buy-out option. Without the
realization of new business opportunities or new management contracts,
management contract terminations could have a material adverse effect on Lakes'
results of operations and financial conditions.

35

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The notes receivable from Metroflag Polo, LLC and Metroflag BP, LLC relate
to the sale of the Polo Plaza property in Las Vegas, Nevada and to the sale of
rights to the adjacent Travelodge property consisting of a long-term land lease
and motel operation. Lakes' collateral for the two notes is the property and
lease rights described above which would revert back to Lakes in the event of
default by Metroflag.

Management periodically evaluates the recoverability of such notes
receivable based on the current and projected operating results of the
underlying facility and historical collection experience. No impairment losses
on such notes receivable have been recognized through December 30, 2001.

The Company believes the costs and complexities of assembling the relevant
facts and comparables needed to appraise the fair market values of these notes
based on estimates of net present value of discounted cash flows or using other
valuation techniques are excessive and the process exceedingly time consuming.
It further believes that the determined results would not reasonably differ from
the carrying values, which are believed to be reasonable estimates of fair
market value based on past experience with similar receivables.

4. INCOME TAXES

The provision (benefit) for income taxes attributable to earnings for 2001,
2000 and 1999 consisted of the following (in thousands):

Reconciliations of the statutory federal income tax rate to the Company's
actual rate based on earnings before income taxes for 2001, 2000, and 1999 are
summarized as follows:

36

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's deferred income tax liabilities and assets are as follows (in
thousands):

Under the terms of its tax sharing agreement with Grand, any further tax
benefits relating to capital losses resulting from the Company's write-off of
its investment in Stratosphere will be shared equally by Lakes and Park Place up
to a benefit of approximately $12.0 million to Lakes.

5. LONG-TERM DEBT

The Company has two notes payable with third parties. The first is
collateralized by certificates of deposit, with $1.0 million outstanding at
December 30, 2001 and December 31, 2000. Interest is compounded and paid on a
quarterly basis at 10%. The principal and any unpaid interest are due December
22, 2002. The second is collateralized by property with $0.4 million outstanding
at December 30, 2001. Interest is compounded and paid on a quarterly basis at
8.5%. The principal and any unpaid interest are due October 9, 2002.

6. CAPITAL LEASE OBLIGATIONS

Pursuant to the terms of the Distribution Agreement, Grand Casinos assigned
to Lakes, and Lakes assumed, a lease agreement dated February 1, 1996 covering
Lakes' current corporate office space of approximately 65,000 square feet with a
lease term of fifteen years. The lease commenced on October 14, 1996. During
2001, also pursuant to the terms of the Distribution Agreement, Lakes entered
into a capital lease arrangement for the corporate office space at which time
the operating lease was cancelled. Accordingly, Lakes recorded a capital leased
asset and liability in the amount of approximately $5.8 million. These amounts
are included on the accompanying consolidated balance sheet as of December 30,
2001.

7. STOCK OPTIONS

Grand Casinos had a Stock Option and Compensation Plan and a Director Stock
Option Plan whereby incentive and nonqualified stock options and other awards to
acquire shares of Grand Casinos' common stock were granted to officers,
directors, and employees.

Upon the consummation of the Distribution, the holders of outstanding Grand
Casinos stock options received one new option to purchase one share of Lakes
common stock for each four options previously held, and one new option to
purchase one share of Park Place common stock for each option previously held.
The exercise price of the new options was apportioned between Lakes and Park
Place to preserve option value as it existed on December 31, 1998 as measured by
the difference between the option exercise price and the fair market value of
Grand Casinos on that date. This value was calculated by reference to the
closing price of Lakes on January 4, 1999 and the closing price of Grand Casinos
on December 31, 1998. Additionally, Lakes has a 1998 Stock Option and
Compensation Plan and a 1998 Director Stock Option Plan which are approved

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to grant up to an aggregate of 2.5 million shares and 0.2 million shares,
respectively, of incentive and non-qualified stock options to officers,
directors, and employees.

Information with respect to the stock option plans is summarized as
follows:

The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net earnings (loss)
would have been as follows (in thousands):

The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, thus the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The fair value
of each award under the option plans is estimated on the date of grant using the

38

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Black-Scholes option-pricing model. The following assumptions were used to
estimate the fair value of options:

8. EMPLOYEE RETIREMENT PLAN

Lakes has a section 401(k) employee savings plan for all full-time
employees. The savings plan allows participants to defer, on a pre-tax basis, a
portion of their salary and accumulate tax-deferred earnings as a retirement
fund. Eligibility is based on years of service and minimum age requirements.
Contributions are invested, at the direction of the employee, in one or more
available funds. Lakes matches employee contributions up to a maximum of 4% of
participating employees' gross wages. The Company contributed $.10 million, $.09
million, and $.03 million during 2001, 2000, and 1999, respectively. Company
contributions are vested over a period of five years.

9. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

During 2001 the Company leased certain property and equipment, including
the corporate office building and an airplane, under non-cancelable operating
leases. Rent expense, under non-cancelable operating leases, exclusive of real
estate taxes, insurance, and maintenance expense was $1.2 million, $1.4 million,
and $1.3 million for 2001, 2000 and 1999, respectively.

In January 2002, the Company purchased the corporate office building;
therefore, no rent payments will be due going forward related to the building.
The airplane lease expires May 1, 2003 and provides for two one-year renewal
terms. Approximate future minimum lease payments due under this lease as of
December 30, 2001, considering both one-year renewals are taken are as follows
(in thousands):

2002........................................................ $ 600
2003........................................................ 600
2004........................................................ 600
2005........................................................ 200
------
$2,000
======

PURCHASE OPTIONS

The Company has the right to purchase the airplane it leases during the
base lease term and any renewal term for approximately $8 million.

During 2001, the Company sold its rights to the Travelodge property in Las
Vegas, Nevada, including its option to purchase the Travelodge property. During
2001, the option to purchase the Cable property in Las Vegas, Nevada for the
purchase price of $39.1 million was allowed to lapse.

39

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LOAN GUARANTY AGREEMENTS

On May 1, 1997, the Company entered into a guaranty agreement related to a
loan agreement entered into by the Coushatta Tribe of Louisiana in the amount of
$25.0 million, for the purpose of constructing a hotel and acquiring additional
casino equipment. The loan term is approximately five years. As of December 30,
2001 and December 31, 2000, the amounts outstanding were $6.8 million and $13.0
million, respectively. Lakes was released from this guaranty agreement at the
conclusion of the management agreement on January 16, 2002.

INDEMNIFICATION AGREEMENT

As a part of the Transaction, the Company has agreed to indemnify Grand
Casinos against all costs, expenses and liabilities incurred in connection with
or arising out of certain pending and threatened claims and legal proceedings to
which Grand Casinos and certain of its subsidiaries are likely to be parties.
The Company's indemnification obligations include the obligation to provide the
defense of all claims made in proceedings against Grand Casinos and to pay all
related settlements and judgments.

As security to support Lakes' indemnification obligations to Grand Casinos
under each of the Grand Casinos Distribution Agreement and the Park Place Merger
Agreement, and as a condition to the consummation of the Merger, Lakes has
agreed to deposit, in trust for the benefit of Grand Casinos, as a wholly owned
subsidiary of Park Place, an aggregate of $30.0 million, to cover various
commitments and contingencies related to or arising out of, Grand Casinos'
non-Mississippi business and assets (including by way of example, but not
limitation, tribal loan guarantees, real property lease guarantees for Lakes'
subsidiaries and director and executive officer indemnity obligations)
consisting of four annual installments of $7.5 million, during the four-year
period subsequent to the Effective Date of the Transaction. Any surplus proceeds
remaining after all the secured obligations are indefeasibly paid in full and
discharged shall be paid over to Lakes. Lakes made the first deposit of $7.5
million on December 31, 1999 and in July, 2000, Lakes deposited $18.0 million in
an escrow account in partial satisfaction of the indemnification obligation.
Such amounts are included as restricted cash on the accompanying balance sheets
as of December 31, 2000 and January 2, 2000. As the $18.0 million was paid out
during 2001, the remaining $7.5 million is included as restricted cash on the
accompanying balance sheet as of December 30, 2001.

As part of the indemnification agreement, Lakes has agreed that it will not
declare or pay any dividends, make any distribution of Lakes' equity interests,
or otherwise purchase, redeem, defease or retire for value any equity interests
in Lakes without the written consent of Park Place.

The following summaries describe certain known legal proceedings to which
Grand Casinos is a party which Lakes has assumed, or with respect to which Lakes
has agreed to indemnify Grand Casinos, in connection with the Distribution.

SLOT MACHINE LITIGATION

In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H. Poulos,
et al v. Caesars World, Inc. et al -- Case No. 39-478-CIV-ORL-22 -- in which
various parties (including Grand Casinos) alleged to operate casinos or be slot
machine manufacturers were named as defendants. The plaintiff sought to have the
action certified as a class action.

A subsequently filed Action -- William Ahearn, et al v. Caesars World,
Inc. et al -- Case No. 94-532-CIV-ORL-22 -- made similar allegations and was
consolidated with the Poulos action.

Both actions included claims under the federal Racketeering-Influenced and
Corrupt Organizations Act and under state law, and sought compensatory and
punitive damages. The plaintiffs claimed that the defendants are involved in a
scheme to induce people to play electronic video poker and slot machines based

40

LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on false beliefs regarding how such machines operate and the extent to which a
player is likely to win on any given play.

In December 1994, the consolidated actions were transferred to the U.S.
District Court for the District of Nevada.

In September 1995, Larry Schreier brought an action in the U.S. District
Court for the District of Nevada -- Larry Schreier, et al v. Caesars World, Inc.
et al -- Case No. CV-95-00923-DWH(RJJ). The plaintiffs' allegations in the
Schreier action were similar to those made by the plaintiffs in the Poulos and
Ahearn actions, except that Schreier claimed to represent a more precisely
defined class of plaintiffs than Poulos or Ahearn.

In December 1996, the court ordered the Poulos, Ahearn and Schreier actions
consolidated under the title William H. Poulos, et al v. Caesars World, Inc., et
al -- Case No. CV-S-94-11236-DAE(RJJ) -- (Base File), and required the
plaintiffs to file a consolidated and amended complaint. In February 1997, the
plaintiffs filed a consolidated and amended complaint.

In March 1997, various defendants (including Grand Casinos) filed motions
to dismiss or stay the consolidated action until the plaintiffs submitted their
claims to gaming authorities and those authorities considered the claims
submitted by the plaintiffs.

In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and amended
complaint. That complaint has been filed. Grand Casinos has filed its answer to
the new complaint. The plaintiffs have filed a motion seeking an order
certifying the action as a class action. Grand Casinos and certain of the
defendants have opposed the motion. The Court has not ruled on the motion.

STANDBY EQUITY COMMITMENT LITIGATION

In September 1997, the Stratosphere Trustee under the indenture pursuant to
which Stratosphere issued its first mortgage notes filed a complaint in the U.S.
District Court for the District of Nevada -- IBJ Schroeder Bank & Trust Company,
Inc. v. Grand Casinos, Inc. -- File No. CV-S-97-01252-DWH (RJJ) -- naming Grand
as defendant.

The complaint alleges that Grand Casinos failed to perform under the
Standby Equity Commitment entered into between Stratosphere and Grand Casinos in
connection with Stratosphere's issuance of such first mortgage notes in March
1995. The complaint seeks an order compelling specific performance of what the
Trustee claims are Grand Casinos' obligations under the Standby Equity
Commitment.

The Stratosphere Trustee filed the complaint in its alleged capacity as a
third party beneficiary under the Standby Equity Commitment. Pursuant to the
Second Amended Plan, a new limited liability company (the "Stratosphere LLC")
was formed to pursue certain alleged claims and causes of action that
Stratosphere and other parties may have against numerous third parties,
including Grand Casinos and/or officers and/or directors of Grand Casinos. The
Stratosphere LLC has been substituted for IBJ Schroeder Bank & Trust Company,
Inc. in this proceeding.

In August 2000, the Court and the parties agreed to try the action upon an
amended joint pre-trial order and a series of post-trial briefs. Post-trial
briefing concluded on December 12, 2000 and oral argument was held on January
22, 2001. On April 4, 2001, the Court entered judgment in favor of Grand Casinos
and issued its findings of fact and conclusions of law. The plaintiff filed an
appeal with the Ninth Circuit and filed its opening brief on November 23, 2001.
Grand Casinos filed its answering brief on January 11, 2002. The plaintiff filed
its reply brief on February 8, 2002, and the parties are awaiting the Ninth
Circuit's scheduling of the matter for oral argument.

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STRATOSPHERE PREFERENCE ACTION

In April 1998, Stratosphere served on Grand Casinos and Grand Media &
Electronics Distributing, Inc., a wholly owned subsidiary of Grand Casinos
("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
recovery of certain amounts paid by Stratosphere to (i) Grand Casinos as
management fees and for costs and expenses under a management agreement between
Stratosphere and Grand Casinos, and (ii) Grand Media for electronic equipment
purchased by Stratosphere from Grand Media.

Stratosphere claims in its complaint that such amounts are recoverable by
Stratosphere as preferential payments under bankruptcy law.

In May 1998, Grand Casinos responded to Stratosphere's complaint. That
response denies that Stratosphere is entitled to recover the amounts described
in the complaint. Discovery is now complete and the matter is scheduled for
trial on May 2, 2002.

OTHER LITIGATION

The Company has recorded a reserve assessment related to various of the
above items. The reserve is reflected as a litigation and claims accrual on the
accompanying consolidated balance sheets.

Grand Casinos and Lakes are involved in various other inquiries,
administrative proceedings, and litigation relating to contracts and other
matters arising in the normal course of business. While any proceeding or
litigation has an element of uncertainty, management currently believes that the
final outcome of these matters is not likely to have a material adverse effect
upon Grand Casinos' or the Company's consolidated financial position or results
of operations.

10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Year ended December 30, 2001 (in thousands, except per share amounts):

Year ended December 31, 2000 (in thousands, except per share amounts):

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LAKES GAMING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS (UNAUDITED)

On January 2, 2002, the Company completed the purchase of its corporate
office building in Minnetonka, Minnesota for $6.4 million, including transaction
expenses. This transaction resulted in the extinguishment of the Company's
capital lease obligation related to the building.

On March 1, 2002, the Company announced it had signed a letter of intent
with respect to an investment in a joint venture with Steven Lipscomb, an
experienced producer of televised poker tournaments. The purpose of this joint
venture would be to launch the World Poker Tour and establish poker as the next
significant televised mainstream sport. The terms of this investment would
require Lakes to make an investment of $100,000 for an approximate 78% ownership
position in the joint venture. Lakes would also be required to lend up to $3.2
million to the joint venture as needed. The joint venture would issue a note to
Lakes at 6.2% interest per annum with principal payable at the end of three
years. The Lakes' note would be secured by a blanket security interest in all
assets of the joint venture. If certain predetermined goals are not achieved by
the joint venture, Lakes would have the right to stop advances on the note. If
Lakes were to elect to stop funding the joint venture, all outstanding principal
amounts would be due one year from the date Lakes stopped funding.

43

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information in response to this item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information in response to this item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this item is incorporated herein by reference to
our definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this 10-K.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Consolidated Financial Statements:

- ---------------

(a)(2) None.

(a)(3)

- ---------------

* Management Compensatory Plan or Arrangement

(b) Reports on Form 8-K.

(i) A Form 8-K, Item 5. Other Events and Item 7, Financial Statements,
Pro Forma Financial Information and Exhibits, was filed on January 2, 2002.

(ii) A Form 8-K, Item 5, Other Events and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits, was filed on
February 4, 2002.

(iii) A Form 8-K, Item 5, Other Events and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits, was filed on
March 1, 2002.

49

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

LAKES GAMING, INC.
Registrant

By: /s/ LYLE BERMAN
------------------------------------
Name: Lyle Berman
Title: Chairman of the Board and
Chief Executive Officer

Dated as of March 28, 2002

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated as of March 28, 2002.

50

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

LAKES GAMING, INC.
Registrant

By: /s/ LYLE BERMAN
------------------------------------
Name: Lyle Berman
Title: Chairman of the Board and
Chief Executive Officer

Dated as of March 28, 2002

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated as of March 28, 2002.